Going through a divorce can be challenging. Suddenly, you are facing large questions about your financial future, and you may become overwhelmed by the many ways in which the divorce will impact your life. For instance, if you and your spouse are in the middle of selling your house, which spouse is entitled to receive the home-sale tax exclusion? Are both of you allowed to take the $250,000 tax exclusion on your individual returns? Do you file jointly to receive the full $500,000 exclusion? Let’s take a closer look at what the home-sale exclusion is, and how it impacts divorcing couples.
As of October 2018, The Washington Post reports that a married couple is legally allowed to exclude from tax any profits they receive from the sale of their home. Of course, there are many requirements that the couple must fulfill in order to enjoy this tax break. For instance, the couple must prove that they used this home as their primary residence for at least two of the previous five years. Additionally, the profit from the sale cannot exceed $500,000.
For single individuals, the exclusion is $250,000, and the same rule applies: you must prove you have used the home as your primary residence for at least two out of the last five years. If you cannot satisfy this requirement, the exclusion diminishes or evaporates altogether. IRS Publication 523 outlines all of the other requirements, so it may be helpful to consult this resource if you want to learn more.
First, you must determine whether you and your spouse will continue to use the house as your primary residence. If this is the case, and you both satisfy the residency requirements, you may be able to claim a federal tax exclusion of up to $250,000 each if you are filing separately, or up to $500,000 if you file a joint return.
The biggest challenge facing divorcing couples is time. If your divorce happens rather quickly, proving the two-out-of-five year residency should not be a problem for you and your spouse. However, if the divorce proceeding drags on, or one person moves out quickly, or you moved to your own apartment long ago when you were having martial issues, you might not qualify for the home-sale tax exclusion.
Of course, there are other factors that could prevent divorcing couples from enjoying the tax exclusion. If you have sold another home within the past two years and you have already taken the exclusion for the sale of that home, even while you were still married, you will not be able to use the exclusion of gain on the sale of your current home. Also, if you choose to remarry before you sell your home, you may no longer qualify for the exclusion.
If you are facing a divorce, experienced family law attorney John L. Davis PLLC can help you successfully navigate the process and ensure your best interests are protected. When divorces involve the real estate matters, Mr. Davis will use his vast knowledge of real estate law to help you understand your options. Call our Vancouver office today at (360) 597-4740 to schedule an appointment with a skilled and trusted divorce and real estate law attorney.
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