Capital Gains Tax - Divorce and selling prior to the 2 years
My son got divorced and as part of the divorce settlement, they had to sell their house. They were in it just shy of 2 years. Is there any exception to the capital gains tax rule when it comes to divorce and having to sell the house prior to the 2 years?
Answers
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Hi,
The rule of each spouse owning and living in the house for 2 years of the previous five years is not negated by divorce. Each spouse must have owned and lived in the house for 2 years to be eligible for the $250,000 exclusion each.
It is possible, when entering the information on the sale of home form when doing the return, that the amount of gain on the home treated as long term capital gains falls within the 12% tax bracket and is taxed at 0%. If it falls in the 22% bracket, then the tax rate would be 15%.
If you have additional questions, please let us know.
Thank you.
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I have a question
I had a judgement against my ex husband as he owed me money from our divorce. I finally received it. Is it taxable even though it was from money I paid out that he was ordered to repay
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will this be a field I would enter when processing the tax return and it would process the correct amount of tax on the capital gain?
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First, let me clarify the IRS rules regarding the home sale exclusion. In Publication 523 it says if you don't meet the Eligibility Test, you may still qualify for a partial exclusion of gain. You can meet the requirements for a partial exclusion if the main reason for your home sale was an unforeseeable event, including if you became divorced or legally separated.
When your son prepares his tax return, he can go to Income > Uncommon Income > Sale of Main Home to enter information about the sale. He will be asked if he sold his home because of a change in workplace location, a health issue, or an unforeseeable event. If he answers yes there, he will be prompted to provide more information about his situation in order to determine if he has a taxable gain from the sale.
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Yes. You would go to the sale of home screen (Income>Uncommon Income>Sale of Home)and answer the questions and the software will process the sale and calculate the long term capital gain and tax it appropriately. When it comes time to do the return, you can check with our customer support to help you navigate the screen.
Thank you.
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Hi Holly, the IRS provides guidance for divorced or separated individuals in Publication 504. It says on page 19 that no gain or loss is recognized on a transfer of property from you to your former spouse if the transfer is incident to your divorce. However, this rule doesn’t apply in the following situations:
-Your spouse or former spouse is a nonresident alien.
-Certain transfers in trust.
-Certain stock redemptions under a divorce or separation instrument or a valid written agreement that are taxable under applicable tax law, as discussed in Regulations section 1.1041-2.
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Thank you Henry I’ll check that out
