MAXIMIZING IRS GAIN EXCLUSION RULES AFTER DIVORCE

When considering a divorce, many couples focus solely on the losses that are expected. Both parties will have to adjust to life without each other’s financial or emotional support, and the expense of setting up two separate households can be difficult to manage. However, when it comes to the tax ramifications of a divorce, there are methods that Texas couples can employ to save money on the eventual sale of their family home.

In many divorce agreements, one spouse agrees to leave the family home while still retaining some percentage of ownership interest in the property. The other spouse continues to live within the home, with the understanding that the property will be sold at a future point in time. This is a common scenario when there are children involved, and both parents wish to maintain a sense of stability for their kids.

Married couples are entitled to a gain exclusion of $500,000 when they sell a home. Unmarried taxpayers are granted only $250,000 in exclusions.However, with proper planning a couple can take advantage of the tax savings long after the divorce is final.

When a Texas couple divorces, a spouse who wishes to claim his or her $250,000 exclusion must be able to demonstrate that they resided in the home for two out of the previous five years. However, there is a way to work around this requirement, by including language within the divorce agreement that states that the spouse who will remain in the home is allowed to do so for a specified period of time. The spouse who leaves the home will still be able to satisfy the ‘use test’ required by the IRS to qualify for his or her $250,000 share of the exclusion, even though they did not actually live within the home for two out of the past five years. This is just one example of how careful planning can pay off for both parties within a Texas divorce.