Sale of a Home During Divorce

In general, property transfers between spouses who divorce are non-taxable. But there are circumstances in which the tax on capital gains applies to transfers made as part of your divorce. Whether and how you are affected by the capital gains tax during your divorce depends on what you do with the house. You and your spouse can exclude the first $500,000 of gain from your taxable income if you sell your house when you get divorced. The exclusion of capital gains applies only to your "main residence," which is defined as a home you have lived in for at least two of the five years before the sale. It doesn't count a holiday house. In a "buyout," because the sale was part of the divorce, the selling spouse does not have to worry about capital gains tax. But if you buy your spouse out, stay in the house, and subsequently sell the house to a third party, the tax on capital gains will be applied. You can exclude the first gain of $250,000. There is a risk that the $250,000 exclusion may not apply when the house is sold for a spouse who continues to own the house but does not live in it. It is important to have written documentation of the agreement to avoid losing the exclusion, which called for one spouse to stay in the house and the other to leave but remain a co-owner. If it is clear that the arrangement was pursuant to a divorce settlement or court order, then on the basis of the resident, the nonresident spouse can still take the exclusion.