Capital Gains Tax and Divorce: How to Preserve Your Biggest Home Sale Tax Break
DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to an advisor regarding your own situation regarding capital gains tax and divorce.
The United States favors married couples in more ways than one. In fact, marriage comes with tax benefits, health insurance benefits, leave benefits, special privileges for social security, income taxes, retirement accounts, and yes, even real estate benefits.
One of the biggest tax breaks for married couples is the $500,000 capital gains tax exemption on the sale of your personal residence, which is double the limit of what single filers can exclude.
According to top real estate agents who’ve negotiated hundreds of divorce sales and a CPA with 40 years of experience, divorcing couples selling property need to structure the sale of their home with care or risk paying more money to the government.
Indeed, when you get divorced, Uncle Sam will once again treat you as a single filer. As if you needed more downer news in the midst of an emotionally trying time, we’re here to help you know your options — because there are ways to sell your home in a divorce and still preserve the tax break.
First things first. What is a capital gains tax break?
Generally speaking, the capital gains tax is the tax imposed on the sale of a capital investment. Real property is a capital asset, so it is subjected to capital gains tax once it’s sold.
However, homeowners have a unique perk when they decide to sell their home — they can exclude up to a $250,000 gain when filing singly or $500,000 when filing as a married couple.
“In other words, if a house had a base cost of $500,000, and then the house sold for a million dollars, that would be a $500,000 gain. But the $250,000 exemption for both the husband and wife [$500,000 total] would allow them to not pay a tax on that gain,” said Bill Katt, a CPA since 1978 based in Kenosha, Wisconsin.
“The exemption is to encourage people to have homes. And it also has a goal of wanting people to upgrade their homes to nicer houses. A lot of people like to do that.”
