When my divorced parents sell their home, who pays the tax?

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Q. My parents jointly own a home in New Jersey that was purchased nearly 50 years ago. They divorced nearly 30 years ago. My mom moved out and subsequently moved out of state about 15 years ago. My dad still lives in the house. They want to sell the house and are working out how to split the proceeds. Would my mom have to pay capital gains taxes on her portion of the gains? What about the exit tax?
— Trying to help

A. Your parents are in a complicated situation but the tax law in these cases is pretty clear.

Your mom would be responsible for her portion of capital gains tax.

There is a home sale tax exclusion in New Jersey that would allow a single tax filer to exclude up to $250,000 of the gain, said Jeralyn Lawrence, a family law attorney with Lawrence Law in Watchung.

Those married filing jointly would get an exclusion of up to $500,000, she said.

But there is a caveat.

“In order to qualify for this exclusion, the mother must own and occupy the home as her principal residence for at least two years before it is sold,” Lawrence said. “Those two years of ownership and use may occur at any time during the five years preceding the date of the sale.”

Unfortunately, your mom may not qualify for this exclusion if she has not used the home as her principal residence in the last five years, but that is not to say other exemptions or exclusions that would benefit your mom might not apply, Lawrence said..

She said once it has been agreed how the proceeds will be divided between the former spouses, it would be important to also speak with a tax professional in New Jersey to determine the extent of the taxes your mom would be responsible for paying upon the sale of the residence.

Now, the exit tax. It’s not actually an extra tax but an estimated tax withholding.

“This is simply a mechanism for the State of New Jersey to collect gross income tax on the resulting gain from the sale of property in New Jersey by non-residents of New Jersey,” she said. “Under the law, the county clerk is not allowed to record a deed without the non-resident seller submitting proper paperwork that determines whether withholding requirements apply or not.”

So, your mom may not have to pay any “exit taxes” if an exemption would apply, but she will most likely have to file the proper documentation at or before the closing on the residence if she is claiming such an exemption.

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This story was originally published on March 16, 2020.

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