Capital gains taxes are the levies on the property that an owner makes when an investment is sold. Capital gains tax is typically owed on profits from the sale of assets that have been owed for at least a year and are typically owed and paid in the year in which you gain the profit. In most cases, if you sell your primary residence or transfer ownership of the property between spouses during or after a divorce, you will not have to pay capital gains tax. However, there are exceptions to this exclusion.
The IRS allows individuals to exclude the first $250,000 of gain from their taxable income. If you sell the property after your divorce, you will need to plan to cover these taxes.
However, this exclusion only applies to primary residences (i.e. the home in which a person has lived for two of the five years prior to a sale). Thus, sales of vacation homes or income properties are not safe from the exclusion rule. Also, if your home is sold for over a quarter of a million dollars, the excess gains will be taxed.
Taxable gain can be calculated by subtracting the selling expenses and adjusted basis from the home’s selling price. The “basis” refers to the amount initially paid for your home or the amount it cost to build and adjusted for tax benefits or improvement costs.
It is important to note that if you buy out your spouse during the divorce, you will not have to worry about paying capital gains tax. You will only need to worry about paying the tax if you make the sale outside of the divorce process. For example, if you buy out your spouse during the divorce and live in the house for a few years, you will have to pay capital gains tax if you later sell the property.
If you sell your house with your soon-to-be ex-partner (during the divorce), you will have to pay capital gains taxes. However, couples can exclude a total of $500,000 of gain from tax if they lived there for two of the five years before the sale. If you purchased the property less than two years ago, the exclusion may be reduced.
Before making any decisions concerning the sale of your home or your divorce, you should consult with our firm. At Dale L. Bernstein, Chartered Law Office, our attorney is equipped to help you understand the tax implications of decisions you make throughout the divorce. Whether you need help understanding capital gains tax and property sales or child tax credits as it relates to custody, we can advise you of your legal rights and the implications of determinations. We handle a wide range of divorce matters, including:
Schedule a case consultation with our firm today by reaching out online or calling (727) 862-4411.