Prepare to Pay Taxes After a Divorce on a Home Sale
There is no doubt about that – the protracted pandemic has caused serious damage to marriages. While some people struggle with job loss and make ends meet, others try to balance the demands of working from home, childcare and homeschooling – often in tight quarters. For unstable couples, disconnecting can exacerbate tensions . And some people may even go for divorce after the pandemic .
We understand that everything is difficult now. If you’re struggling to get through the day, it can seem overwhelming to think about the future. But if you’re on the verge of divorce, you can take steps to cut your tax bill later, especially when it comes to selling a home, which often happens when couples get divorced.
Tax Credit for Profiting from Your Main Home
Let’s say you bought your main home a few years ago. Since property values are still rising in some places, your home may be worth more than when you first bought it. This is good, but there is a downside. If you sell your home and make a profit, you may have to pay additional taxes on the money you earn, that is, capital gains. Capital gains tax rates usually range from 0% to 20% , depending on your income.
The good news is that you may be eligible for a tax credit. If you qualify, you will not have to pay capital gains tax on the first $ 250,000 of profits if you are single and $ 500,000 if you are married. However, there are some rules for obtaining tax credits.
How to qualify for a tax credit
To qualify for the tax credit, you must pass two tests . You must own a home for two out of five years before you can sell it. If you are married, either you or your spouse must take an ownership test. The second rule is the residency requirement. The home must be your primary residence, not a vacation spot, for two of the last five years prior to closing. Both spouses must pass a residency test to be eligible for the full US $ 500,000 tax credit.
You can read the full participation rules in more detail here .
Why your separation or divorce agreement matters
If one of you stays in the house and you sell it a few years later, it can be tricky to take the residency test. However, there is a way around this: Your separation or divorce agreement should explicitly state that this is allowed, which can be easy to ignore. Skipping that buzz could mean the difference between future tax credits of $ 250,000 or $ 500,000. For more information, contact your local tax lawyer.