One of the harsh realities about life is we all have to pay taxes and about half will end up getting a divorce at one point or another. Bottom line, no matter how amicable or straightforward a divorce is – it is never easy. Many issues develop when it comes to dividing and liquidating various assets; the home you shared in particular can be a major issue.
Regardless what you decide to do with the home, there will be tax consequences that you will want to discuss with your professional tax adviser, lawyer or accountant. It doesn’t matter if you decide to sell the home and split the proceeds or for one of you to remain in the home and raise the children, there will be tax obligations that you are expected to deal with.
Let’s look at 6 different scenarios that you may find yourself in if you are either going through a divorce or one might be on the horizon. We’ll examine these scenarios for potential tax implications while offering some tips for homeowners going through a divorce:
Sell the home and share the proceeds
One of the most common solutions for divorcing couples who own a home is to sell it and split the proceeds evenly, or whatever percentage you may agree on.
It’s important to know the real value of your home so working with a real estate agent who not only understands the divorce experience you both trust but who has a true local knowledge to price the home correctly. The price depends on your goals – some couples want out instantly while others are more prudent and are willing and able to wait for a true market price.
When selling a primary residence, it’s possible to walk away without any tax liability on the proceeds. A married couple, filing jointly is entitled to receive up to $500,000 in profit from the sale and avoid any capital gains, while each tax payer, filing separately can claim a $250,000 profit tax free.
There are, of course, more details you need to figure out, such as knowing that the home being sold has been the primary residence for 24 out of the last 60 months and that the capital gains exception can only be claimed once every two years. So if you just sold a house recently, you’ll probably be owning taxes on this sale.
Do your due diligence and check with your tax professional to see how this works for you.
Buy your spouse out
It’s fairly common for one spouse to want to remain in the home and is willing to buy out the other spouse. A common solution is for the remaining spouse to refinance the home to pay off the current mortgage and give the other spouse the agreed upon funds.
Agreeing on a fair price does not necessarily mean half the value. Many divorcing couples will decide the buyout price that’s corresponds to the others income and who will be the primary parent in taking care of the children.
Consult with a real estate agent to determine a fair price for the home and help you determine what number makes sense for the buyout. While the transaction may seem very straightforward, it’s best to have a real estate agent handle the transaction to insure that the property changes hands in an efficient and legal manner. No one wants to be tracking down an ex-spouse many years later for a signature and, heaven forbid, that the long gone spouse is now looking for a slice of the pie when you’re selling the home, years later.
In addition, the departing spouse will want evidence that the mortgage they are responsible for has been paid off and that they have no future obligations to the property.
One spouse stays and raises the children: Sell the home at a pre-determined date
Some divorcing spouses will decide to allow one spouse to remain in the home and raise the children until a pre-determined date or event, such as high school graduation, the youngest turns 18 or 21 or whatever future date or event is relevant to their family.
This can be tricky when it comes to tax liabilities. Remember earlier we mentioned that capital gains can only be applied to homes that have been your primary residence for 24 out of the last 60 months? Well, if the future date extends beyond the 60 months then the departing spouse may no longer qualify for this huge tax benefit.
Consult with your divorce attorney and have them add a clause in your divorce agreement that the home is still to be considered your primary residence for tax benefits. You’ll probably have to share this document with the IRS at the time of your filing, after the sale of the home if you want to avoid a huge tax liability.
There are other tax questions that need to be explored and discussed as well. Make sure your tax professional is aware of every decision you are making so they can help you structure it properly, based on the then current tax code.
Share the home
This option is only for the brave at heart. Do you think you could still remain under the same roof, after deciding to become divorced? While it might make financial sense, it is sure to be difficult on many different levels.
Depending on the circumstance and how it is shared it should certainly help establish residency for the IRS and granting both of you the capital gains benefit. Certainly having your mail delivered to the home will help establish residency, even if you spend part of your time somewhere else.
If you and your spouse own rental properties there are many different scenarios that may unfold. Some may prove to be beneficial while others may become a huge determent to your financial health.
Be careful how titles are transferred. Make sure your tax advisor fully understands everything that is taking place, with the divorce.
Consider one of the spouses moving into one of your rental properties. Again, we cannot emphasize strongly enough how important it is to strategize, not only with your attorney but with your accountant.
If you and your spouse own a vacation home chances are you won’t be able to qualify its sale under the capital gains exclusion, because it probably was not your primary residence for those 24 out of the last 60 months.
If you did live in your vacation home for any 24 of the last 60 months but rented it out for any portion of the remaining 60-month period you may be entitled to a pro-rated exclusion. Just know that it gets complicated.
Divorce is very taxing
Divorcing your spouse is a very complicated scenario, under the best of circumstances. Not taking into account the emotional issues you’ll have to deal with, and the associated drama as it unfolds, divorce is not only complicated, but can be expensive.
There will be other tax issues to take into consideration that you’ll want to review with both your attorney and your accountant. If there are children, there will of course be the issue of child support.
If you are the breadwinner spouse and pay child support, it will be your spouse who gets to claim the children as dependents and won’t be responsible for claiming the child support as income. On the other hand, if you are paying alimony then this amount can be written off your taxes and the spouse receiving the funds will have to declare it as income.
For more information and a clearer understanding of what you’ll be dealing with, as far as the Internal Revenue Service is concerned, you should go online and find IRS Publication 523, “Selling Your Home.”
Like all big endeavors in life, it will be easier to reach a favorable outcome with the right team of professionals. Not only will you want an experienced attorney and accountant to help you navigate but a successful local real estate agent that can help you achieve your goals while understanding what involved with the whole divorce process.
Call us today and get the information you need to make the right decision. The info is free, call now! (951) 296-8887.
Questions regarding available inventory and/or other real estate matters please contact me, [email protected] Mike Mason, broker/owner/Real estate agent of MASON Real Estate. Cal. BRE: 01483044, board of directors, Southwest Riverside County Association of Realtors® (SRCAR).