Avoiding Capital Gains Tax on Sale of Marital Residence During and After Divorce

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Avoiding Capital Gains Tax on Sale of Marital Residence During and After Divorce

November 23, 2019 | Divorce, Property, Wealth

Avoiding Capital Gains Tax on Sale of Marital Residence During and After Divorce

A capital asset is any property owned by a taxpayer that is not bought or sold in the course of  business. This includes significant pieces of property such as homes, cars, investment properties, and investment accounts.  Therefore, a marital residence is a capital asset.   

A capital gain (or loss) occurs when a capital asset is sold or exchanged.  A long-term capital gain (or loss) is a gain (or loss) from the sale or exchange of capital asset owned for more than  one year, a short-term capital asset is owned for less than one year. 

To calculate a capital gain, first calculate how much money was put into the property by the taxpayer, i.e.  how much did cost to buy it and improve it (this is called an adjusted basis).  Then, calculate how much the property sold for, minus selling expenses (this is the amount realized).  The capital gain occurs when the amount realized exceeds the adjusted basis (capital loss occurs when the adjusted basis exceeds the amount realized).  In other words, capital gains are the profits from the sale of an asset. 

Capital gains taxes are taxed according to a variety of factors including the tax bracket of the person with the gain, the type of asset, and whether the gain is short-term or long-term.  Generally, a long-term capital gains tax is lower than a short-term capital gains tax. 

There is an exemption to capital gains tax when the primary residence is sold.  To qualify, the taxpayer must have occupied the house as a primary residence for at least two years of the preceding give years and the taxpayer cannot claimed the exemption in the past two years. Under this exemption, taxpayers on a joint tax return can exclude up to $500,000.00 in gain when this type of residence is sold.  A single taxpayer can exclude up to $250,000.00 in gain. 

If a house is sold while a divorce is pending, and the parties do not get divorced until the following year, then the parties can file joint tax returns and exclude up to $500,000.00 of the gain.  If the house gets sold after the divorce, and each spouse still qualifies for the exemption, then each spouse can exclude up to $250,000.00 of gain when they file an individual tax return.  

The Botti Law Firm, P.C. has been serving DuPage and Cook County residents for nearly 50 years.  If you would like to speak to one of our experienced attorneys, please email us or call (630) 573-8585 to schedule a free consultation.

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