Money Matters:  Taxes

DIVORCE PLANNING TIPS IF YOU OWN YOUR HOME

By Ginita Wall, CPA, CFP

With passage of the Taxpayer Relief Act of 1997, Congress enacted sweeping tax reduction legislation last August. For those contemplating divorce, it alters dramatically some of the tax problems and benefits. This article discusses the major changes in taxes as it effects the sale of your home

No More Tax on the Sale of Your Home
Courtesy of the Taxpayer Relief Act of 1997, most people will no longer have to pay capital gains tax when they sell their home. The new law allows you to exclude up to $250,000 of gain ($500,000 on a joint return) when you sell your home. This isn't a "once in a lifetime" offer. You can exclude the maximum gain each time you sell your home, as long as you have lived in it for two of the five years before sale.

Forget about the old rules for excluding gain if you are over 55, or having to invest in a new home within two years. Those rules are completely superseded by the new law. It doesn't make any difference if you used one of the old rules in the past. The new law's exclusion will apply to all your future home sales.

If you are separated and have moved out of the home, you can still qualify for the $250,000 exclusion. Your old home will be considered to be your residence if your spouse has been occupying it prior to sale under the terms of a divorce or separation agreement or court order.

If you sold your home between May 7 and August 4, 1997 you can choose between the. old rules and the new rules. If the gain for each spouse is over $250,000, use the old rules to reinvest in a new home and defer the capital gains. If you use the new rules, the portion of your. capital gains over $250,000 will be fully taxable.

For example, Harry and Sally have owned six residences during their 25-year marriage, now ending in divorce. Each time they sold a home, they deferred the tax by rolling the gain into the next home. The gain when they sell their current residence will be $600,000. Under the new tax law, they can each exclude $250,000 of gain, so they will owe tax on $100,000 of the gain. Under the old rules, they each could have purchased a new home costing half as much as the old home and deferred the gain.

TIPS:

  • If you moved from the house less than three years before sale, you will have lived in the house for two of the five years prior to sale and you can exclude $250,000 of your share of the gain. 

    If you have been out of the house for more than three years, however, it is imperative that you and your spouse have a written agreement or court order granting your spouse exclusive use of the residence, to preserve your ability to fulfill the residency requirement.

  • This new exclusion of gain opens the door to joint ownership of homes for extended periods after divorce. Dad can agree to let Mom and the kids live in the house until the youngest child graduates from high school. 

    As long as the divorce decree provides for Mom's exclusive use of the home, Dad will be able to exclude his share of the gain when the home sells.

  • Couples who own both a residence and a rental can exclude gains on the sale of both. 

    Here's how:
    George takes title to the residence and sells it. while Susie moves into the rental for two years, and then sells it. Each can exclude up to $250.000 of gain. (Susie will have to pay tax at a 25% rate on any depreciation claimed on the rental after May 6, 1997.)

This Article Divorce Planning Tips If You Own Your Home was written by Ginita Wall, CPA, CFP