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Divorce and Taxes – A 4-Part Guide to Avoiding Costly Mistakes – Part 2: How to Minimize Capital Gains Taxes When Selling the Marital Home After Divorce
Selling the marital home can be one of the most emotionally and financially challenging aspects of divorce. Understanding how to minimize taxes when selling your home is crucial to making the best financial decision. Often, homeowners overlook potential tax consequences during the sale, leading to unexpected financial burdens down the road.
Lili Vasileff, a Certified Divorce Financial Analyst (CDFA) at Wealth Protection Management, and Stacy Collins, a Certified Public Accountant (CPA) at Stout, are here to provide valuable insights on how to minimize taxes when selling the marital home during a divorce. Their expert advice will help guide you through this complex decision with minimal confusion.
How Can I Avoid Paying More in Taxes When I Sell My House After Divorce?
Vasileff explains that if you sell your home as a couple, you can exclude up to $500,000 in gains from capital gains taxes. However, if you sell it after the divorce, you can only exclude up to $250,000 as a single taxpayer. One important factor to consider is your home’s cost basis. Any home improvements, such as adding a new roof or finishing a basement, increase your cost basis and reduce your taxable gain. Properly documenting these improvements can help lower your potential tax liability.
Collins adds that to qualify for these exclusions, you must meet certain requirements:
- You need to have lived in the home as your primary residence for at least two of the last five years before selling.
- You cannot have sold another primary residence within the past two years, although some exceptions may apply.
How Can I Effectively Track My Investment Property’s Tax Costs?
It’s important to maintain thorough records, including the purchase price, improvements, and other associated costs of investment properties. Collins emphasizes the importance of having these details documented, so when it comes time to sell, you can accurately assess your tax obligations.
Tracking the tax costs of an investment property can be complicated, especially if you haven’t been the one handling the records. Stacy Collins shares a case where one of her clients faced this challenge during a divorce settlement. The client was set to receive a valuable investment property but had not kept track of its cost basis. To avoid potential tax issues, she specifically requested that her husband provide all necessary cost basis information, and she made it a requirement in the settlement agreement. Without this documentation, she wouldn’t be able to calculate the property’s potential gains, or the taxes owed upon its sale.
Avoid Costly Tax Pitfalls When Selling the Marital Home in Divorce
Selling the marital home during divorce is an emotional and financial decision with significant tax consequences. Understanding the capital gains tax rules and planning ahead can save you thousands—and protect your post-divorce future.
At Vacca Family Law Group, we help you weigh these decisions with your best interests in mind, ensuring you don’t miss critical tax-saving opportunities. Reach out for a free introductory call to see how we can support you through this transition.
Stay tuned for Part 3 of our 4-part series, where we’ll explore costly but common tax mistakes in asset division and how to avoid them.
More from this series:
- Part 1: Hidden Tax Traps in Divorce: What You Need to Know Before Dividing Assets
- Part 3: Common Tax Mistakes Divorcing Couples Make–and How to Avoid Them (coming soon!)
- Part 4: Long-Term Tax Planning for Divorce: How to Protect Your Financial Future (coming soon!)
Vacca Family Law Group is located at One Grand Central Place, 60 E. 42nd St., Suite 700, New York, NY 10165.
