There are several things that are important to consider from a tax perspective when you are looking to sell the family home. If you and your spouse will be splitting the profits or equity from the home, you must both claim the respective shares you receive on the sale. If however, the sale of the home resulted in a loss, then you are still obligated to report your share of the loss to the IRS.
There are some circumstances where if the main family home is sold, you can be eligible to exclude up to $500,000 of the sale price.
However, in order to be able to claim the entire amount there are some guidelines that must be meet in accordance with the IRS rules and regulations.
In order to be eligible to exclude up to the full $500,000 you and your spouse must be filing a joint return for the year in which the home was sold. You are not allowed to file separate returns and claim the entire exclusion. You or your spouse must meet the ownership test as set forth by the IRS, and you or your spouse must also meet the requirements for the use test as well. However, the final portion of the requirements involve neither spouse having claimed the exclusion in connection of a sale from a home in the last 2 years.
For spouses who plan to file separate returns it is also possible to claim an exclusion. For a separate return, you are only allowed to deduct up to $250,000 for each return. However, in order to be allowed to claim this amount on each individual return each spouse must individually qualify for the return. This means that each spouse claiming the exclusion must meet the ownership and use tests. They must also not have claimed the exclusion in the last two years from the sale of a piece of property as well.
To determine if you are eligible based upon the ownership and use tests you must have owned the home for at least 2 years out of 5 years. Additionally you must have lived in the home yourself for two years as well out of 5 years. However, these two times do not have to occur at the same exact time. For example, if you purchase the home and live there for one year, but move out for 2 years without selling the home, then move back for a year before you sell the home then you would qualify for the exclusion.
There are some guidelines, which will allow you to claim a portion of the exclusion without meeting the ownership and use tests, however those are typically very difficult to secure. It is best to consult with an accountant in regards to your exact case and details to see if you qualify for an exception in this case. Because it is possible to split the exclusion between the spouses, it is generally best to file a separate return to ensure that your taxes are computed correctly based upon your income, rather than the income of your spouse.
If you are confused about whether you qualify for the exclusion seek the advice of an accountant who knows your exact circumstances as well as income and the sale price of your home to determine if you are able to claim all or a portion of the exclusion. With the knowledgeable advice of an accountant, you should be able to see a very minor impact from the sale of the family home on your taxes.
Here are additional resources you might be interested in:
Who Gets to Keep the House After Divorce?
Can you Afford to Refinance the Mortgage?
What Options Do I Have with the Family Home?
Divorce and the Division of Property
More information on Divorce Properties and Finances
click here.
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