For many divorcing couples, the family home is vacated and sold — either voluntarily or as a means to fairly divide marital assets between them. If you and your ex-spouse are among these, it's important to understand the tax implications of that home sale. Here are five of the most important things to know.
1. Most Profit Is Excludable. The good news is that many home sellers find that the profit on their home — the difference between their capital investment and what they netted upon sale — falls under the IRS exclusion amount and is non-taxable. As of 2022, this amount was $250,000 per person or $500,000 for joint-married filers.
2. You Must Satisfy the Rules. To claim the full exclusion, you both must satisfy the IRS rules. You must have used the home as a primary residence for two out of five years, not excluded gain from another sale in the last two years, and be an actual owner. You'll also need to file your taxes jointly to use the combined exclusion.
3. Spouses May Qualify Separately. Commonly, one spouse moves out prior to a divorce and home sale. If this happens to you, each spouse calculates their portion of the exclusion separately. So the one still living there may qualify for the exclusion but the other may not. However, you can both still benefit from one party's exclusion by filing jointly.
4. Temporary Absences are Allowed. Look back at the previous five years. Did you vacate the home for any extended periods? These may not be disqualifying factors. You can leave for vacation, school, or similar events without stopping the clock. And even if you've turned the home into a rental for up to three years, you may still fit the criteria. Finally, the ownership and use periods don't have to coincide.
5. Divorce Allows Early Exits. The IRS does allow homeowners to claim a reduced exclusion if they have to sell the home unexpectedly and don't qualify under all the normal rules. Divorce is one of these exceptions — rightly deemed unforeseen circumstances. If using this exception, you'll prorate the amount of exclusion permitted to each party.
Where to Start
Clearly, there can be a lot for a divorcing couple to do in order to minimize any taxes on the sale of their marital home. To ensure you understand and apply the IRS rules, make the right calculations, and claim any exceptions available, start by scheduling CPA tax services. With their help, you and your ex can move on from this aspect of your divorce as calmly and profitably as possible.