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Watch out for tax issues when selling the home in a divorce

For many Florida residents, the largest purchase they will make in their lives is the family home. Given the value and importance of the family home, this real estate can be the most important piece of marital property that must be addressed in a divorce.

When parties are deciding how to divide the marital home in a divorce, however, there is much more that must be considered in settlement agreements than how to divide the proceeds from the house. When individuals plan to sell the home, for example, a key issue that can arise is how those proceeds will be taxed.

Under the federal income tax exclusion, individuals can sell their homes and pay no federal income tax on gains up to $250,000. As with many tax issues, this number doubles to $500,000 for those individuals who are married.

There are certain requirements that must be met in order to qualify for the joint exclusion. Typically, at least one spouse must own the home and both spouses must have used the home as a main residence.

The divorce can also present timing issues with qualifying for the exclusion. If the divorce has not been finalized, the couple may qualify for the exclusion if they were considered legally married at the end of the year the home was sold. Typically, if the home is sold shortly after the divorce, the individual claim may still be made. However, the larger joint exclusion may no longer be available.

If a person continues to reside in the home long after the divorce, it is difficult for the party who does not reside in the home to claim the gains exclusion if proper steps are not taken before the divorce is finalized. A stipulation can be added to the divorce agreement, however, which allows the gain exclusion to be claimed for the non-resident. Accordingly, this is one of many important issues that should be thought of at the time the divorce agreement is being negotiated.

Source: StreetWise Journal, "Heading for divorce? The gains tax exclusion may save you money," Jacob Maslow, June 30, 2016

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