It depends on what happens to the family home as part of the divorce. If the house is transferred to one spouse (or share of jointly owned home transferred) as part of a divorce settlement, there is considered no gain or loss, therefore no capital gains taxes are due.

Where it gets more complicated is if family home is sold to a third-party, and when such sale takes place. Currently the tax code allows an exclusion of $250,000 individually ($500,000 for married filing jointly) in capital tax gains* for selling a principal residence, so long as certain eligibility requirements are met. To be eligible for the exclusion, the home had to be your principal residence, had to be owned for two of the last five years, and had to be your residence for at least two of the last five years. You are ineligible to qualify for the exclusion if you have taken the exclusion within the last two years, the property was part of 1031 exchange, or you are subject to expatriate taxes. In regards to the ownership requirement, if the home was transferred to you by your ex-spouse, you can count any time they owned the home as time you owned it. The residence requirement is different and requires you (not just your spouse) to have resided in the home to meet the eligibility requirement. An exception to this is if you are an owner (or co-owner) of the residence and your former spouse is allowed to live in the home under a divorce agreement and use as principal residence, then the time they reside there counts towards your residency requirement.

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Scenario 1

Wife transferring her joint ownership in the home to husband as part of divorce settlement, they bought the home a year ago, they mutually agreed (but no written agreement) she would live in it until divorce finalized so she has lived there solely the last 6 months. Capital gains tax does not apply to this transfer from one spouse to other since part of divorce settlement. If husband later sells the house to a third party a year after the divorce was finalized, capital gains taxes would apply, and he would not qualify for the exclusion. His ownership would meet the 2-year eligibility requirement, but he has not met the two year residence requirement because wife’s 6-month sole occupation was not part of a divorce agreement, so does not count towards his satisfaction of the requirement.
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Scenario 2

Same as Scenario 2, but instead there was a written divorce agreement stating wife would have sole occupation of the house until transferred. Husband would therefore meet both the ownership and residence eligibility requirements for the exclusion of capital gains tax on the sale of the house to third party a year later.
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Scenario 3

Spouses agree to sell home to a 3rd party as part of divorce, they owned and lived in it for at least two years. Capital gains tax would apply, but exclusions would apply as well, so unless more than $250,000 in gains per individual, no taxes due.

All is not lost if you have owned (or resided in) the home for less than two years but it has to be sold to a third-party as part of a divorce, you may still qualify for a partial exclusion of capital gains tax even though did not meet the eligibility test. A divorce qualifies as an “unforeseeable event”, allowing for partial exclusions to apply. As demonstrated above, each circumstance is different, therefore it is best to consult with your attorney and tax accountant to best reduce or eliminate possible tax implications associated with the disposition of a marital home.

Gains are the difference between your basis (what you paid for the house plus improvements) and what you sold it for, so basically your profit from the sale, not the entire selling price.

This does not address property taxes that may become due for the property, which is a different subject matter.

Protect your investment. Schedule a consultation with the attorneys at Allison & Mosby-Scott if you have questions regarding the tax implications of selling your home when divorcing.

Derek Luster

Attorney at law