If you and your spouse have decided to sell off the marital home as part of your divorce, you might find you can sell it for a large amount of money. This might seem like great news, but you may have to pay capital gains taxes on your sale. While you can exempt some of your proceeds from taxation, you might end up paying more in capital gains taxes because of your divorce.
Nerdwallet explains that the IRS will levy capital gains taxes differently depending on whether you are single or married at the time you sell your home. So whether you sell your home as a married or a single person will matter a great deal in how much you have to pay in taxes.
Differences in filing single or jointly
The IRS allows you to exempt $250,000 of your home sale if you file as single. However, if you are currently married and filing a joint return, you could exempt $500,000. So if you and your spouse decide to sell a marital home, conducting the sale while you are still married could allow you to exempt more of the sales amount from capital gains.
Obstacles to using the exemption
However, circumstances may prevent you from taking advantage of capital gains exemptions. You cannot exempt part of a home sale if you sell off a vacation or secondary home. The exemption only applies to a primary residence. Also, you need to have owned the house for at least five years, plus you must have lived in the home for at least two of those years.
Additionally, you can lose out on the capital gains exemption if you already claimed the exemption on another home two years before selling your current residence. The IRS may also deny you the exemption if you need to pay the expatriate tax, or if you had purchased your marital home through a swap called a 1031 exchange.
Finding ways to reduce the tax burden
You might find other ways to reduce taxes on your home sale. The IRS may permit you to exempt part of an otherwise taxable gain if you show you had to sell your home due to health or work reasons, or because of an unforeseeable event. You might also cut your capital gains by showing you have conducted a lot of work on the home, like putting in new windows or landscaping.
Divorce cases vary, so what works for one couple may not work for another. Still, working out a way to sell a marital home while reducing the taxes on the proceeds may end up benefiting both spouses.