Some Florida residents planning to divorce may wonder about the tax implications. Divorce often includes the sale of a home. The Internal Revenue Code may allow a spouse to exclude some of the gain from a home sale from being considered income. Knowing how to take advantage of these laws can become important in a complex asset divorce.
An individual can exempt $250,000 of gain on a home from tax liability. A married couple’s exemption is $500,000 if they file a joint tax return. However, the seller typically must have owned the property for at least two years during the five-year period before the sale, and both spouses must have used it as a principal residence for at least two years.
If a couple sells the marital home before the divorce is finalized, they may be able to file a joint tax return to exclude the full $500,000 in capital gain from their income. The spouses may also be able to file separately so each may claim an exclusion on up to $250,000 as marital property, if both spouses owned and resided in the home. Alternatively, a spouse who remains in the home for at least two years and remarries prior to selling may be able to claim the full amount. If the home is sold years after the divorce, the non-resident spouse might be taxed on the full amount of the gain.
One way to avoid this undesirable outcome is to address it at the time of divorce. In some cases, it may be possible for a family law attorney to draft a settlement agreement that addresses and helps avoid negative tax consequences. That way, it may be possible to avoid nasty surprises at tax time.
Source: Marketwatch, “When the IRS overlooks a couple’s divorce“, Bill Bischoff, June 18, 2013