Avoiding Tax Traps in Divorce

Should You Sell Your House Before Your Divorce is Finalized?

The median price of single-family existing homes rose in nearly all -- 99% -- of the 183 markets tracked by the National Association of Realtors in the third quarter of 2021, with double-digit price increases seen in 78% of the markets. While there have certainly been hot seller’s markets in the past, none quite compare to the current market where more than 50% of homes for sale have fetched over the asking price. If your divorce also means selling the house, remember that when you do it matters.

Divorce Tax Trap: Capital Gains Tax

If you sell your home at a profit, you might have to pay capital gains tax. Capital gains tax is a tax on the profit from the sale of your home. Before you can calculate how much you owe in taxes on any home sale, you need to figure out your tax basis in the property. In simple terms, the basis is the amount of capital investment you have in the property for tax purposes. That tax basis is going to depend on how you came to own your home.

If you bought your home, the cost basis in the property starts with the purchase price. Certain closing costs for the home are also included. If you have any expenses you put into the property for remodeling or construction that add to the value of the property or prolong its life, those are also part of your cost basis. Finally, if you pay any taxes that the seller was supposed to pay, this also counts as part of your tax basis.

Here’s a quick example to give you a better understanding of how this works: You buy a property for $200,000. There are $10,000 in closing costs. You pay $5,000 in taxes which would otherwise be owed by the seller. Finally, you put $20,000 in for remodeling. That makes your total cost basis in the property $235,000. If you sell your home for $450,000, your profit that is possibly subject to capital gains tax is $215,000. That capital gains rate most people pay is 15%.

Capital Gains Tax Exclusion

You can exclude up to $250,000 from your taxable capital gains on a property used as your residence for at least two years. A married couple can exclude up to $500,000 from the sale of their house when filing jointly. The timing here is everything. If you think you’ll net over $250,000 in profit from the sale of your home, it would be wise to sell the house ahead of the divorce filing. If the property is instead transferred to one spouse and sold later, that tax exclusion drops to $250,000 and you’ll pay 15% on every dollar of profit above $250,000 when you sell it on your own. If you failed to sell the house prior to filing divorce, you may what to take this hidden tax into consideration when negotiating the equitable distribution of your other marital assets.

Plan Before You File Divorce

If you’re thinking about divorce, our experienced and trustworthy divorce lawyers at Fiffik Law Group are here to help you decide when the time is right to file and how to avoid hidden divorce tax traps. Our lawyers have provided guidance to thousands of clients and we’re ready to bring that experience to bear in your case. Contact us today.