Divorce Without Going Broke
By Janet Bouma, CDFA

Let's talk about tax issues on the sale of a residence.

The old tax law said we could rollover the gain from selling our house, that we could take a one-time exclusion for $125,000 and that capital gains would be taxed at 28%.

The new tax law says there is no longer a rollover, there is a $250,000 exclusion for single people, and a $500,000 exclusion for a married couple. We can use these exclusions over and over as long as there is at least two years between sales. Capital gains will be taxed at 15% for most people and those in the 15% or 10% tax bracket, capital gains will be taxed at 5%.

In order to take the exclusion, the IRS says you must have owned the home for two of the last five non-consecutive years and have used it as your primary residence for two of the last five years. This is called the use and ownership period. What happens when one spouse moves out and the divorcing spouses decide to sell their home and split the proceeds in three years, when their daughter graduates from high school? Can they take advantage of the marital exclusion? There are two special rules relating to divorce regarding the ownership period and the use period.

There is an Ownership Period exception that allows the non-owner spouse to use the period of time that the owning spouse owned the home as if they owned it too. This is helpful, for instance, in the case where Linda marries Jim and moves into his house that he has owned for six years. They get divorced within one year and she gets the house which she then immediately sells. She has not owned it for two years, but she can use Jims' ownership period to qualify to take her exclusion.

Before the Tax Relief Act of 1997, there wasn't a Use Period exception for divorcing couples. So if the husband moved out and the divorce was not final for more than two years, he was unable to roll forward his gain, and he was taxed on the gain at the time of the sale of the home. Now the rule allows the non-occupying spouse to use the Use Period of the occupying spouse.

The Use Period, which is a new rule as of TRA '97, states that in the event one spouse transfers a residence to the other pursuant to a divorce decree, the "transferring spouse" shall be able to include the "receiving spouse's" use period in computing their own use period.

When considering the sale of your marital home, and the disposition of all your assets, make sure you, your attorney and your Certified Divorce Financial Analyst are familiar with the tax implications; and your decision is a good financial decision, not an emotional one!

Janet Bouma is a Certified Divorce Financial Analyst, Regional Director for the Institute for Divorce Financial Analysts, financial consultant, and a trained Family Mediator. Janet and her associates at Bates Barksdale Ickert & Company work with clients, their attorneys and/or mediators in helping clients make sound financial decisions in the divorce process. For your complementary consultation, please email her at janetbouma@bbicpa.com or call 412-367-2101.

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