Sell the House Before or After Divorce?

Is it better to sell your house before or after a divorce?

Selling a house before a divorce can simplify asset division and may lead to a cleaner financial break. It allows both parties to share the expenses related to the sale and potentially avoids complications of one party trying to buy out the other. However, selling after the divorce can provide more stability during the divorce process, though it may involve complex arrangements regarding ownership and expenses.

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 understand 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.

ReadFrequently Asked Questions about Divorce in Texasfor 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 from selling 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 from selling that home. When you’re divorcing, of course, this can get complicated, and there are plenty of details to consider.

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 are 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.

Further Details

As with almost everything else that involves the IRS, there are more details to consider:

  • You cannot have sold another home and taken the same tax exclusion in the previous 24 months to capitalize on the tax exclusion.
  • 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 about selling your home during a divorce.

Divorce: Throwing a Wrench into the Situation

Divorce complicates 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 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 $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 enjoy the tax exclusion. However, if one of you moves out of the marital home (as 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 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 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 maximize valuable tax exclusions.

FAQs on Selling the House Before or After Divorce

Who is better off financially after divorce?

Financial outcomes post-divorce can vary widely depending on individual circumstances, such as the length of the marriage, each party’s income, and custody arrangements for children. Typically, the spouse who earns less or who may have sacrificed their career for the family may face more financial difficulties post-divorce.

How many years does it take to financially recover from divorce?

Recovery time can vary based on numerous factors, including pre-divorce income levels, assets, debt, and whether or not one receives spousal support. Generally, it might take several years for individuals to regain their financial footing.

What is the first thing to do when separating?

The first step should be to secure legal and financial advice. Understanding your legal rights and responsibilities, and organizing your financial documents, will help you navigate the separation process more effectively.

Why is moving out the biggest mistake in a divorce?

Moving out can affect your claims to the property and may impact custody arrangements. Remaining in the home might ensure better leverage in property and custody negotiations.

How do I avoid capital gains tax after divorce?

To avoid capital gains tax, make sure the house is sold while it is still considered the primary residence of both spouses. Additionally, you can utilize the capital gains tax exclusion for married couples, which is higher than for single filers.

Why should you never leave your house in a divorce?

Leaving the house can negatively affect your position in property disputes and might influence child custody decisions. It’s often advised to stay in the home until all agreements are finalized.

Who ends up worse after divorce?

Typically, the non-custodial parent or the lower-earning spouse may face more severe financial challenges post-divorce, although the impact can vary widely based on individual circumstances and local laws.

What is the regret rate for divorce?

Studies suggest varying levels of regret, but a notable number of individuals report regret, often due to the impact on finances, lifestyle, and family dynamics. The rate can vary widely, but emotional preparedness and realistic expectations can mitigate feelings of regret.

Is it better to buy out a spouse or sell a house?

This depends on your financial situation. Buying out a spouse allows one party to keep the house and provides continuity, but it requires sufficient liquidity to pay the spouse their share. Selling the house divides the asset cleanly, which might simplify financial arrangements.

Can my spouse get half of my inheritance?

In most jurisdictions, inheritances received before or during the marriage are considered separate property if kept distinct from marital assets. However, this can vary, so it’s important to consult with a legal advisor.

How to keep a house in divorce without refinancing?

One way to keep the house without refinancing is to offset the value of the house by allocating other marital assets of equivalent value to your spouse. Alternatively, creating a property agreement that compensates the departing spouse over time may also be a viable solution.

Your Divorce and 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 your most significant asset, 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 way to keep the custodial parent in the family home until the children graduate high school. Your dedicated family law attorney will help you explore the options available to you and help you find the best resolution for you and your children. Divorce is stressful, but an experienced attorney will prioritize your best interests and 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. Most of us have much more invested in our family homes than simply a dollar amount. If you are facing a divorce and will likely 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 contact us and fill out an online evaluation or call us at 713-781-7775 today.

For more information on Divorce in Texas, check out the following articles: