Q. I got divorced a year ago after being separated for more than five years. My ex-wife has been living in the property for the last six years and I lived elsewhere. The gain after paying off the mortgage and closing costs is $77,000. As part of the divorce decree she gets half the money. Do I have to pay capital gains on the whole capital gain or half?
A. To answer your question it is important to understand three basic things about your situation.
The first thing to understand is what your actual capital gain is on the sale. Next is what part of this gain will be taxed by the IRS, and finally, you need to understand what your divorce settlement says and how that will impact your set of circumstances.
Your capital gain is not what you keep in your pocket after the sale of a property, said Amber Leach, a certified divorce financial analyst with AXA Advisors/R.I.C.H. Planning Group in Morristown.
In general, she said, your capital gain is the difference between what you paid for your house plus any improvements — not repairs — and what you sold the property for minus any selling costs.
Once you know the capital gain, you need to figure out what, if any, is taxed.
Like most things concerning the IRS, this can be complicated, Leach said, so you should consult your accountant or go to IRS Publication 504, Divorced or Separated Individuals.
As a boon to homeowners, the IRS does offer an exclusion for paying tax on capital gains if certain conditions are met, Leach said.
“For single filers you can exclude $250,000 in capital gains and if married filed jointly you can exclude $500,000,” she said. “However you do need to pass certain eligibility tests.”
The two main tests are concerning ownership and residence requirements, Leach said. You must have owned and resided in the property for at least two years out of the last five years prior to the sale, she said.
“You may pass on the ownership requirement but clearly you do not pass the residence test,” Leach said.
Next you should turn to your divorce settlement, which Leach said may provide the relief that you are looking for.
“If your divorce settlement clearly states that pursuant to a divorce you continued to co-own the house but your spouse was to live in it without you, then you may qualify based on her residency,” Leach said. “You should address the IRS with your adjusted numbers pursuant to the divorce on your 1099s and include your divorce settlement stating the facts of your arrangement.”
Your divorce lawyer and tax accountant can help you further investigate if the total facts of your case allow you to take advantage of the exclusion, she said.
Email your questions to [email protected].
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.