During a divorce, what to do with the marital home is one of the first concerns that comes to mind. The couple essentially has three choices; they could sell the house and split the proceeds, they could agree to have one spouse buyout the other spouses interests, or they could continue owning the house jointly.
Each choice has its respective advantages. The couple is encouraged to think about the long-term consequences of their decision, especially since each choice will affect your taxes differently.
If you as a couple decide to continue owning the house jointly, you avoid tax problems entirely.
However, many spouses do not like this option because it makes their ex their business partner. If you decide to buyout the other spouse or sell the house and split the proceeds, here are some tax issues to consider. If a buyout is chosen by one spouse, the house has to be appraised independently.
After the appraisal, the couple might divide the property with a property settlement note. One spouse will pay the other spouse a sum for an agreed upon length of time at current interest rates. In this case, the money is a division of property, meaning it is not taxable. The recipient does pay taxes on the interest, but not the principal.
Couples sometimes do not like this option because it creates a creditor-debtor relationship.
Selling the marital home is a very common route. In 1997, the Taxpayer Relief Act was put in place, which allows you to exclude $250,000 from the sale in your taxes.
If you file jointly with your spouse you can exclude $500,000.
To qualify, the home must have been your primary residence for 2 to 5 years before the sale. Every 2 years, homeowners are allowed to exclude their capital gains from property sales. Many individuals take advantage of this by selling rental properties.
If you need to sell the home before the 2 year requirement, you can still exclude part of the gains if you qualify for an exception. You qualify for an exception if you have unforeseen circumstances, like a required move for employment, or selling the home because of health issues.
It is important that you are aware of these issues if you are getting a divorce. If one spouse moves out, both parties can still get the exclusions on a future sale if you have a written court order.
If you sell your home and gain more than the exclusion amount allowed, the federal tax rate is 15 percent.
It is important that you consult a tax advisor so you fully understand the tax implications involved in selling your home. Your divorce attorney should be able to assist you in understanding the tax implications that would be involved when selling your home. Get all the facts and ensure you have an aggressive legal team ready to get you a favorable divorce settlement,
