Do I Need to Worry About Capital Gains Tax on Family Home in Divorce?
For many divorcing couples, particularly those with young children, thinking of “divorce” largely revolves around thoughts of dividing the family home. But what is a divorcing spouse to expect when a split is finally decided? For example, does a divorcing mom need to worry about paying a capital gains tax related to the family home after a divorce?
While this article will provide some general information regarding divorce and capital gains taxes – it is important to remember that divorce is complicated, divorce law is complicated, and tax law is no different. Nuance is key and the specific answers you need in your particular situation can only be obtained by gaining official advice via a consultation with esteemed legal professionals. The experienced divorce and property division attorneys of Fort, Holloway & Rogers can help you as you navigate through these questions.
For now, here is some general information on the capital gains tax, and why it matters in divorce cases.
What is a Capital Gains Tax?
Generally speaking, when a significant asset such as a piece of real estate is sold, a “capital gains” tax will be levied on the profit. Among other things, it is important to note that this tax is not owed until the asset is actually sold and the gain is realized.
So what does this mean for a family home in a divorce case?
U.S. tax code 1041(a)
The pertinent law – U.S. tax code 1041(a) – states that a transfer of property “incident to divorce” does not result in a gain or loss. This means that (generally speaking) capital gains tax should not, ordinarily, be triggered if a property is exchanged between partners as part of dividing property in their divorce case. This is due, primarily, to the fact that they are not receiving the benefit of a capital gain. Exchanging the interest in a home as part of a division of property is not a loss, or a gain per se – it is a distribution of interest in the marital estate.
Incident to Divorce
So a transfer of property “incident to divorce” will likely not be subject to a capital gains tax – but what is incident to divorce? Well, this means that the transfer of property took place:
- within one year after the finalized divorce, or
- within 6 years of the marriage ending, and was called for under the divorce decree.
Even if the property is not transferred within that six year timeframe, you may still qualify for the tax exemption if the transfer of property was part of the divorce’s property division terms.
Selling the Family Home
Many couples do more than transfer interest – they outright sell the home and divide the proceeds. This can, under certain circumstances, trigger capital gains taxes.
When a property changes hands between partners, the courts recognize that it is part of the property division and distribution of marital assets. The couple already owns the home – there is not a gain or loss, just a distribution of assets.
Important exclusions apply in capital gains issues – it is always important to receive qualified, expert legal advice concerning nuances in complex areas of the law. The elite attorneys at Fort, Holloway & Rogers can help.
Contact Fort, Holloway & Rogers
To begin speaking with experienced divorce and p Froperty division attorneys, contact the esteemed legal team at Fort, Holloway & Rogers.
Sources:
irs.gov/forms-pubs/about-publication-504
irs.gov/taxtopics/tc701
