Tax Consequences Associated With Marital Home in Divorce

Although this may not be as relevant for many people in the current economic climate as it has normally been, what happens to the marital home in the divorce may generate significant tax consequences, either good or bad. Handled properly, it should be good.

Under the right circumstances, a single taxpayer may avoid tax on $250,000 in capital gains resulting from the sale of a primary residence. For a married couple, that amount doubles to $500,000.

This shelter is available to the couple both during the divorce and after the divorce is finalized, provided all other requirements are met.

Where the couple continues to own the residence together indefinitely after the divorce (think exclusive use and possession of the home with the custodial parent until the children are grown), the other spouse risks not qualifying due to the home not being his or her principal residence.

According to tax experts, an explicit provision in the marital settlement agreement or final judgment of divorce for temporary exclusive use and possession with one spouse preserves the primary use position of the other spouse as well if both spouses continue to own the home, or even if the spouse who vacated has sole ownership after the divorce.

Of course, a taxpayer should always consult their own tax advisor for tax advice relative to their specific situation.

Read more in this BST Financial newsletter article: A House Divided.