Buying a new home is an exciting new beginning for married couples. When the time comes to sell the home, the 4Sale sign may not be under such happy circumstances. When the sale of the marital home may come with potential Capital Gains Taxes, it is important to have an understanding of the available exclusion rules.
In order to use the Capital Gains Exclusion on the sale of the marital home, two rules must be met.
- Ownership: You must have ownership of the property.
- Use: You must have lived in the home for 2 of the last 5 years as your primary residence.
What happens when a divorcing couple hasn’t lived in their new home for a full two years yet will be facing a Capital Gains Tax on the sale of the home?
The Divorcing Couple could be in luck as the IRS may offer a prorated Capital Gains Exclusion due to the divorce.
Let’s say that Mike and Kim purchase a new home in July of 2017 for $400,000. In January of 2019, they are getting a divorce and must sell the marital home. Current market value is $550,000. After the cost of selling the home, they will have a Capital Gain of $125,000.
The standard rule for using the capital gains exclusion requires that Mike and Kim must have lived in the home for 2 of the last 5 years; however, in their case, they have only lived in the home for 18 months. Mike and Kim may use a prorated capital gains exclusion equivalent to 18/24 or 75% of the available exclusion amount. It is recommended that they speak with a tax accountant to verify their prorated exclusion.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.
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