May 24, 2023

Tax Considerations of Selling Your Marital Home

By Heather L. Santonino, Partner, Tax & Business Services

Tax Considerations of Selling Your Marital Home Marital Dissolution

One of the major assets in a divorce is often the marital home. Below is a list of several key tax considerations when selling your marital residence.

  1. The transfer of the home between spouses is not a taxable event. As such, there is no income to be recognized by the receiving spouse, but the carryover tax basis applies to the transferred property.
  2. If the marital home is sold the year before the divorce is finalized, the spouses agree to file a final joint return, and the requirements under IRC Section 121 are met, up to $500,000 of the gain on the home sale could be excluded.
  3. In many cases, the ownership of the marital home will be transferred to one of the spouses. If the sole owner spouse sells the house after the divorce is finalized and the IRC Section 121 requirements are met, the maximum capital gain exclusion is $250,000. If the owner remarries and the requirements are satisfied with the new spouse, there may be an opportunity to qualify for the $500,000 joint exclusion.
  4. Capital gains taxes are calculated based on graduated tax rates. If the lower-income spouse receives the marital home in the divorce settlement, the capital gains taxes paid could be significantly less than if the higher-income spouse was taxed on the gain.
  5. The divorce agreement may state that one of the spouses resides in the home for a specified timeframe, and the house will be sold in a future year. This often occurs when there are minor children, and the spouses agree to co-ownership of the property. The spouse who remains in the home will meet the use requirements for the $250,000 exclusion. If the divorce settlement clearly states the terms of the agreement, the non-resident spouse can also qualify for the $250,000 exclusion since the sale was delayed pursuant to the divorce.

There are many factors to consider when it comes to the ownership and sale of the marital residence. The rules are complex, so special consideration should be taken throughout the divorce process to ensure proper planning and documentation for minimizing capital gains taxes. Please consult your Marcum Advisor to assist with any questions.