Maximizing Profits on Your Home Sale during Divorce
Divorce in Texas is complicated, and taxes are complicated. The combination of the two can be overwhelming. One of the most critical components of any divorce is the division of assets, and because your family home is likely your greatest asset, the sale of your home in the divorce process can play a significant role. As such, it’s important to have a working understanding of the tax basics as you move forward. Your experienced Houston divorce attorney will guide you through the process to help ensure that you minimize any capital gains taxes on the sale of your home.
Read “Frequently Asked Questions about Divorce in Texas” for more information on the divorce process.
Capital Gains Tax and the Sale of Your Home
The Internal Revenue Service (IRS) may allow you a tax exclusion of $250,000 on the capital gains you receive with the sale of your primary home. If you file jointly with your spouse (even a soon-to-be ex-spouse), you can potentially exclude up to $500,000 in capital gains received in the sale of that home. When you’re divorcing, of course, this can get complicated, and there are plenty of details to take into consideration.
The Home Exclusion Rule
In general, tax rules allow homeowners to exclude any profits made in the sale of their primary home from being taxed as income as long as two major conditions are met:
1. You and your spouse lived in the home as your primary residence for at least two of the last five years.
2. The profits you received from the sale of your home is not more than $500,000.
If your divorce is finalized before you sell your home and it remains your primary residence, the exclusion may still apply, but it will be divided in two, and your cap will be set at $250,000 in profits.
As with almost everything else that involves the IRS, there are more details to consider:
• To capitalize on the tax exclusion, you cannot have sold another home and taken the same tax exclusion in the previous 24 months.
• If you remarry before you sell the marital home from your previous marriage, you may forfeit your eligibility for the tax exclusion.
Again, it’s imperative that you work closely with an experienced family law attorney before making any important decisions regarding the sale of your home during a divorce.
Divorce: Throwing a Wrench into the Situation
Divorce has a way of complicating things, and this is never more true than when it comes to your finances. If you’re divorcing, the home-exclusion tax rule continues to apply to either you or your spouse (or possibly to both of you, depending upon who is living in the home as a primary residence), but whether you sell the house during or after the divorce can have an effect. Let’s consider two scenarios by way of example:
1. If you and your divorcing spouse both continue to live in your marital home (as each of your primary residences) until the house sells and you jointly file your taxes that year, you should be able to exclude a total of $500,000 from any profits you make on that sale. If, on the other hand, you file separately, you should each be able to exclude $250,000.
2. Until your divorce is finalized, you and your divorcing spouse can continue to file joint returns, and as long as you both meet the residency requirement, you can both enjoy the tax exclusion. However, if one of you moves out of the marital home (as so often happens during a divorce) the two-year residency requirement (two years out of the previous five) will come into play.
Both of these considerations are important to keep in mind as you move forward with your divorce. If you do get the tax exclusion and your divorcing spouse misses out on the tax break, you may be asked to make up for the financial discrepancy in your divorce settlement.
The Optimal Approach
Optimally, if one of you will not be keeping the marital home post-divorce, it’s in the best interest of both of you to sell your house sooner – rather than later – in the divorce process. If your divorce becomes more financially complicated and/or contentious as it proceeds, the time component could leave you unable to collect on the full $500,000 (combined) tax exclusion. Consult with a skilled Houston divorce attorney to help ensure that you maximize valuable tax exclusions.
Your Divorce: Your Home
Every divorce is unique and uniquely complicated. After issues related to child custody, however, the division of your assets will likely be the most important issue you and your divorcing spouse will face. While your home is very likely the most significant asset you possess, it is also your home, and you may not be inclined to leave it – especially if you still have children at home. There’s a lot to consider. Some couples find a means of keeping the custodial parent in the family home – at least until the children have graduated from high school. Your dedicated family law attorney will help you explore the options that are available to you and will help you find the best resolution for you and your children. Divorce is stressful, but an experienced divorce attorney will prioritize your best interests and will aggressively advocate for a positive settlement resolution.
If You Are Facing Divorce, Consult with an Experienced Houston Divorce Lawyer Today
Divorce, in and of itself, is difficult. When you compound the issue with the sale of your home, things become even more complicated – financially, logistically, and emotionally. In fact, most of us have much more invested in our family homes than simply a dollar amount. If you are facing a divorce and are likely going to have to sell your home, you need the professional services of a Houston divorce attorney. The dedicated legal professionals at the Rudisel Law Firm, P.C., in Houston, focus exclusively on divorce and family law, and we’ll help you better understand your options and help you find a resolution that works for you. For a free initial consultation, please fill out an online evaluation using the “Contact Us” link in the menu or call us at 713-781-7775 today.
For more information on Divorce in Texas, check out the following articles: