Taxes: What Tax Issues to Consider when You Have Sold Your Home in Divorce
For those going through a divorce, the complexity of emotions and quantity of decisions can be overwhelming. If you are considering selling your home during the divorce, it can be even more traumatic, particularly in a tough real estate market. Add tax issues into the mix and you can face a real headache.
Cindy Morus, a Licensed Tax Preparer and a Certified Divorce Financial Analyst based in Oregon, said, “The main tax issues surrounding a home sale are the same whether you’re married or divorced: Home interest, property taxes, and equity are the three main tax issues related to selling a home. It’s important to look at the long-term consequences of selling or keeping the home.”
Wevorce asked experts if they could offer some tips to help as you deal with divorce, the sale of your home and the tax issues that may come with it this year — or next. Among the tips they offered:
1. Agree on financial division of assets.
Examining cash flow in 20 years with or without the house payment, “may be a wake-up call to see how a home that was paid for by two people can (or can not) be supported by one income,” said Morus, who operates dontdivorceyourmoney.com. “If you decide the house must be sold and agree on how to divide any money you make, this process becomes easier. If both parties are in agreement on sales price and any contract issues — repairs, closing date, etc. — then things can go fine,” said Linda Leitz, founder of Pinnacle Financial Concepts and Divorce Solutions, Inc. “If both owners can’t agree, it can end up in a legal mess,” she said. This can be especially challenging now in a time of rapidly falling home prices, as many people only remember the higher valuation from a few years ago.
2. Get an expert to help with tax details
There are important tax implications in ahome sale. So even if you’ve done your own taxes in the past, dealing with a real esate issuein the middle of a divorce is complex and you might want to consider a financial professional.”Sometimes in an emotional issue such as divorce, people are scared, so they go talking to the first person they meet and that person might not necessarily have the same financial priorities or sensitivity to help with a particular situation,” said Tracy Piercy, certified financial planner and founder of Moneyminding Inc., a financial education system and network. According to Carol Ann Wilson, founder of the Institute for Certified Divorce Planners and Chief Learning Officer of the Academy of Financial Divorce Practitioners, “Most divorce attorneys aren’t familiar with the tax laws that can save their clients money.”
3. Only one of you can claim a tax credit.
As far as the interest deductions and property tax credit, in most cases only one party in the divorce can claim these if filing separately. Both parties will have to agree upon who will claim the interest and property tax and then put it in writing in the divorce decree. Equity is also an issue, but mostly if one party decides to live in the house and sell at a further date, in which case division of equity and details such as future realtor fees and closing costs will have to be split at a rate agreed upon at the time of divorce. If these issues are not dealt with and one party ends up staying in the house and selling at a later date, he or she could be stuck with all the resulting fees.
4. Use of residence clauses and other tax issues.
Complications may arise if a couple has been separated for some time and only one spouse has inhabited the house as a primary residence for two out of the last five years. In this case, it is possible in most cases to attach a “Use of Residence” clause to your taxes and still qualify for the married rate. Once again, however, it is extremely important to speak to a local professional and make sure you are abiding by your state laws as well as the federal law.
5.Determining capital gains tax on your house sale.
If you decide to sell your home during the divorce, a local tax or financial professional will be able to determine how much can be sheltered from capital gains taxes for each party. If you are still married when you sell the home and it has been a primary residence for both of you for at least two out of the last five years, the standard tax rules will apply. “Whether you reinvest or not is immaterial,” says Morus. “The rules for a primary residence are if you sell it as a married couple, the first $500,000 of capital gains is tax free; it’s $250,000 for a single person.”
About the author: Mandy Vemulapalli is a freelance writer living in Chandler, Arizona. She has an MFA in Creative Writing from UNLV and currently writes for BizAZ Magazine, Woman’s World Magazine and various websites.
