Divorce is the dissolution of a legal contract, and the process consists of seemingly endless details. Some of the most significant divorce details include tax implications, which should receive the careful attention they deserve. An important component of many divorces is the sale of the marital home, which is often the spouses’ largest asset, and maximizing the profits in the course of this sale is important to both you and your divorcing spouse (which can make it an easier sell when it comes to negotiations).
Better understanding what you can do to help ensure you maximize your home sale profits, including all tax benefits that apply, is an important part of proactively guiding your divorce financials (How Much Does a Divorce Cost in Texas?). If you are facing a divorce, the best way to ensure that you help protect your financial rights throughout the legal process is by working closely with an experienced Gatesville divorce attorney.
The IRS Weighs In
The IRS allows a $250,000 tax exclusion for capital gains after the sale of your primary home. This means that you will not have to pay tax on up to $250,000 in profits you earn from the sale of your family home (this tax advantage does not apply to second homes or vacation homes). If you and your spouse file jointly, you can exclude up to $500,000 from taxable capital gains, but it is important to understand the ins and outs of this tax advantage before plunging in. If you and your spouse are divorcing but are not sure how your living situation will evolve as your divorce progresses, things can become very confusing very quickly.
Capital Gains Home Exclusion Rule
Capital gains, as mentioned, refer to income or profits that you have realized over the course of the year, such as from the sale of your home. The IRS’s general stance on capital gains home exclusion rules is that you can exclude the profits you realize with the sale of your home (up to $250,000 if you file singly and up to $500,000 if you file jointly) as long as the following two primary conditions apply:
You used the home as your primary residence for at least two out of the last five years.
The profit from the sale of this home does not exceed $500,000.
If your divorce has not been finalized when you sell your home, you and your soon-to-be-ex can still file jointly and take advantage of the capital gains home exclusion tax advantage that way.
Divorce Has a Way of Complicating Nearly Everything
Divorce is often a lengthy process, and it is difficult to recognize the trajectory your divorce is going to take at the outset. In fact, even the friendliest divorces can turn contentious in the blink of an unforgiving eye, and hotly contested divorces sometimes calm down and become far more amicable. The point is that it can be very difficult to predict how your divorce will proceed.
The Clock Is Ticking
One factor that is very important to pay attention to is if one of you moves out of your marital home while your divorce is pending, which is very common. If this does happen, it sets the clock ticking regarding the capital gains home exclusion tax advantage. If your divorce drags on, it can have important tax implications for the party who moved out, which could leave him or her in line for more serious consideration when it comes to the division of your marital property.
In other words, even if your spouse moves out and his or her taxes are affected, it can end up seriously affecting your finances. If you are going to sell your family home, addressing the matter of capital gains and tax implications earlier rather than later may be to your distinct advantage.
Additional Considerations
Other factors that can play a role in whether or not you will be able to take advantage of the capital gains tax break include the following:
If you have already availed yourself of a capital gains home exclusion tax advantage in the last 24 months, the tax break will not be available to you.
If you remarry before your family home from your previous marriage is sold, your right to the capital gains home exclusion tax advantage is forfeited.
Divorce is complicated; taxes are complicated; and when combined, they can be overwhelming – but a dedicated divorce attorney with extensive experience handling complicated divorce tax matters can help.
The Division of Your Marital Property in a Texas Divorce
In the State of Texas, the property that you acquire over the course of your marriage, which generally includes your family home, is considered marital property. In the event of divorce, this marital property must be divided between you in a manner that is deemed equitable – or fair given all relevant circumstances – by the court. As such, your marital property may not be divided exactly equally, and wide-ranging factors will go into the court’s decisions. If your marital home is sold as part of your divorce proceedings, this capital gains tax advantage will be addressed directly. If your home’s sale is slated for after your divorce is finalized, however, the court will address how the proceeds will be divided and will take the capital gains home exclusion tax advantage into consideration.
You Need an Experienced Gatesville Divorce Attorney in Your Corner
Tax implications are one thing that can make divorce even more complicated, and because your family home likely plays not only a financial but also an emotional role in your divorce, you can expect plenty of drama. Brett Pritchard at The Law Office of Brett H. Pritchard – proudly serving Gatesville, Texas – is an accomplished divorce attorney who is well equipped to help you protect your financial rights throughout your divorce (however they play out). To learn more about how we can help you, please do not wait to reach out and contact or call us at 254-501-4040 today.
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