Getting Divorced And NOT Selling the House? Here’s What You Must Do

When you get divorced your home is often one asset that needs to be divvied out between the two sides. In many cases today, ex-spouses will continue to own their former homes together even after one has moved out.

This can make it tricky for the non-resident ex to qualify for the valuable capital gains exclusion when the house is eventually sold.

To avoid paying capital gains on the profit from a home sale, you typically have to live in the home for two out of the past five years. But if one ex lives elsewhere and the home is sold for a profit years later, the non-resident ex’s share of the home sale profit can be fully taxable.

You can avoid this problem if you prepare beforehand.

If you are the non-resident ex, insist the divorce papers state that, as a condition of the divorce agreement, your former spouse may continue to live in the home until the children leave for college or for any other agreed amount of time. Once the agreed upon time to sell the home is reached, the home will be sold (or your ex-spouse can buy out your portion).

The use of this language allows the non-resident ex to earn “credit” for the continued use of the property. This way the non-resident ex will likely still pass the two-out-of-five-years use test, qualifying them for the $250,000 capital gain exclusion privilege.

It’s the little things that may be overlooked that can end up making the difference in situations like this. If you have any other questions feel free to contact me and I will help you out in any way that I can.

Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please discuss your individual situation with a trusted tax adviser before making tax decisions.

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