Throughout the divorce proceedings, there are a plethora of choices that have to be made about assets, custody of the kids, etc. For a typical couple, the largest financial decision usually involves the house. Our site is full of resources regarding options you have with your home during a divorce. This article was written specifically to cover the topic of capital gains taxes and how they come into play when selling your family home. Do it right and you can limit taxes substantially!
Capital Gains Tax & Selling Your House
Capital gains taxes are another set of taxes that Uncle Sam likes to collect every time you “Pass Go.” Just make sure to pay so you don’t “Go To Jail!” Before we dive deeper, let’s first explain what capital gains taxes are so we are on the same page!
Capital Gains Explained
In the simplest terms, capital gains tax is a specific type of tax that occurs when you make money selling something you own (usually an investment or personal property). It’s applicable on a variety of transactions ranging from stocks/bonds to vehicles. The two different types of capital gains taxes are short-term and long-term. If the asset was owned for less than a year, the gains are considered short-term.. These gains can be taxed between 10% all the way up to 40%. On the other hand, long-term gains (on assets owned more than one year) are typically taxed at a lower rate of 0-20% depending on the total gains, marital status, and tax bracket of the seller. One other important note is that any improvements made on the asset can be factored into the original cost of it as well. (So be sure to keep receipts for the big improvements!)
For example, let’s say you bought a car for $10,000 and sold it three years down the road for $14,000. In this scenario, you’re on the hook to pay long-term capital gains tax on that $4,000 gain. However, if you had paid $1,000 to have a new engine put in before reselling, you would only be liable to pay capital gains tax on $3,000.
Exemptions to Capital Gains
Unlike cars, stocks, and other personal possessions, homes are protected from extreme capital gains taxes through certain exemptions. To be eligible for exemptions, there are three conditions that you must meet:
- Owned the home for a minimum of two years within the five years directly preceding the sale.
- Used the home as your primary residence for a total of at least two years within that same five-year period.
- Haven’t excluded gains from a different home sale in the two-year period before the sale.
If you meet these qualifications and plan to sell your home in the midst of a divorce, the exemptions on these taxes can be dramatic! The exemption amount for a single person is $250,000, which is good. However, for a married couple that owns/sells the house together, exemptions reach up to $500,000. That being said, if you are thinking of divorce and are planning on selling the house for whatever reason, it’s beneficial in most circumstances to sell prior to getting divorced.
You’ll save potentially thousands of dollars on capital gains taxes if you take advantage of these exemptions. We understand this means you may have to delay your divorce. For some people, that may not be worth any amount of potential savings. The best-case scenario would be to find someone who can buy your home quickly and allow you to take advantage of the exemptions, but also allow you to continue with your divorce so you’re able to move on. Most traditional sales take a bit longer to process. But cash buyers can typically finalize everything within just a couple of weeks.
We’re investors: can we help?
If a cash offer is something you’re interested in, click on the green side bar. We would love to discuss the options we can offer you. And if you’d like to read more about selling to an investor, click here. Please remember this content was created solely for informational purposes and is not intended to provide advice or legal counsel.