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Avoiding capital gains tax during divorce

On Behalf of | Jun 27, 2023 | family law |

There are several challenges to getting a divorce in New Jersey. If you need to sell a marital home in connection with the divorce, you can take steps to minimize the capital gains tax. This is an issue if you stand to gain more than $250,000 from the sale of your home.

Taxable and nontaxable events

When one spouse is granted ownership of the marital home in a divorce, it does not trigger a taxable event. However, if the home eventually gets sold, the sale itself may be subject to taxation based on the capital gain realized. Fortunately, divorcing individuals have various strategies at their disposal to minimize the capital gains tax when selling their homes.

Sell the home

One viable strategy is to sell the home before officially finalizing the divorce to capitalize on certain tax benefits. For instance, if the divorce is finalized on January 1st, the divorcing couple can aim to sell the home by December 31st of the preceding year. By doing so, the IRS recognizes them as a married couple during the home sale, making them eligible for a $500,000 exclusion. It is important for the couple to file a joint tax return for the year in which they sell their home to benefit from this exclusion.

Splitting home ownership

In certain divorce settlements, each spouse may be granted a specific percentage of ownership in the house. This means that one spouse holds X percentage of the home while the other spouse possesses the remaining percentage. If both spouses individually own their respective shares of the home for at least two years within the initial five-year period leading up to the sale’s date, and both can establish the home as their primary residence for at least two years during that five-year period, they may qualify to individually exclude $250,000 from the sale of the home for tax purposes.

A divorce is a challenging situation that takes a toll on a person emotionally and financially. Understanding the available tax strategies can help a divorcing couple minimize their tax liability.