Capital Gains Tax In Divorce Settlements

Addressing the capital gains tax in divorce settlements is something that is often overlooked when couples split up.  If you will be keeping the marital home, you need to consider how the eventual sale of the home will affect your taxes when drafting your divorce agreement.  The following question on this issue shows what needs to be factored in when splitting the equity in the marital home.

Maryann's Question:  The house that we are selling is in my name, and the profit will be split 60/40 because I invested more into the house. How will this effect my taxes and what questions or protections should I consider. I don't want to pay tax on money that will be going to him?

Timothy's Answer:  You are wise to be questioning the capital gains tax before your divorce is final. In order to determine whether you will have a tax liability when the marital home is sold, you should familiarize yourself with the IRS tax rules on the sale of a home. Currently, the IRS allows married couples to exclude up to $500,000 of the gain and individuals to exclude $250,000 from their taxable income. In order to qualify for this exclusion, your home must be your primary residence and you must have owned and occupied your primary residence for at least two of the last five years prior to the sale.

To figure the gain on the sale of your home you will need to know your basis. For most people, it is the original amount you paid for your home. However, if you have made any improvements or taken any deductions then you will need to calculate your adjusted basis. For example, if the original cost of your home was $200,000 and you added a $10,000 pool, your adjusted basis becomes $210,000. If you then took an $8,000 loss for a flood, your adjusted basis becomes $202,000. To calculate your profit or loss, you should subtract the adjusted basis from the selling price of the home. If the number is positive, you have a gain. If the number is negative you have incurred a loss. Your taxable gain is determined by subtracting the maximum allowable exclusion from any profits.

If you find that you have a taxable gain, you should consider inserting a clause in your divorce agreement that states: The parties agree that the real estate, located at 125 Flower Street, Boston, Massachusetts 02180, shall be listed for sale at market price. Net proceeds of this sale after deduction of all expenses, taxes, liens and mortgages will be divided as follows – 60% to the Wife and 40% to the Husband.

Timothy McNamara is a certified divorce financial analyst, specializing in the financial issues that couples and individuals face when their marriage ends. Having gone through a divorce himself, he is passionate about helping people understand and manage the complicated financial issues divorcing couples often face.

This column is not intended to take the place of professional advice, but rather to provide financial information about the various issues that arise in a divorce.  For specific recommendations concerning your situation, you should retain an experienced certified divorce financial analyst who can answer your questions based on the details of your case.  WomansDivorce.com, Timothy McNamara, and Tracey Manzi disclaim any liability from any claim arising from any information contained in this column. This column is not a substitute for professional advice.

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