Sale of Principal Residence

Sale of Principal Residence

Many divorcing couples will pay little or no capital gains tax upon the sale of their marital residence. IRC §121 allows single taxpayers to exclude up to $250,000 of the gain; while married taxpayers that file joint returns can exclude up to $500,000 of the gain. To qualify for the $500,000 exemption, you must file a joint return. Therefore, both spouse's names must remain on the title after the divorce is final. Then each spouse can exclude up to $250,000 of gain from the sale of the residence on their individual tax return.

Following are the requirements to qualify:

• Generally, taxpayers can only exclude from gain one sale every 2 years. Exceptions include: a change in the taxpayer's place of employment, health issues or unforeseen circumstances.
• Taxpayer(s) must have owned and used their principal residence for two (the two years do not need to be consecutive) of the last five years prior to the sale.

The capital gain tax rates are:

There are special rules for the ownership period and use period relating to divorced taxpayers.

Ownership Period

A taxpayer can include the ownership of a transferor spouse as part of the taxpayer's ownership period. A taxpayer meets the ownership test if the taxpayer owned the residence for two of the past five years including any period of ownership by the transferor spouse.

Use Period

If one spouse, pursuant to a divorce decree or separation agreement, is required to grant the other spouse the right to temporary possession of the residence, but retains title to the residence, and the residence is later sold, the non-occupying spouse will be treated as having used the residence for the period of time that the occupying spouse used the residence as his or her principal residence.