27 Jun We’re separated. Will I owe tax when we sell the marital home?

Q. I have a question about capital gains tax and divorce that I think has a twist. I have been separated for 10 years. I will be filing for divorce this year. I have been out of the marital house when she kicked me out 10 years ago and I’ve been renting an apartment. When divorce is finalized and the house is sold, do I have to pay capital gains tax? If I do, can I give a portion of the profit to my kid as a gift to lower my tax?
— Planning

A. We’re sorry to hear about the divorce.

You may be in luck when it comes to income taxes on the anticipated gain that will be realized upon sale of the house that you and your spouse still jointly own.

Normally, one must both own and use a principal residence for at least two out of the preceding five years leading up to the date of sale in order to be entitled to exclude up to $250,000 of gain for singles or $500,000 if filing married and jointly, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

“He said even though you have not lived in the house for the past 10 years, if your spouse has been living in the house under a separation agreement, her use of the house as her principal residence is imputed to you as though you were using it all that time,” he said. “Thus, you would qualify for a gain exclusion of up to $250,000.”

If you do not qualify for the gain exclusion because you don’t have a written separation agreement, you cannot get a reduction of tax by gifting the profits to your child, he said.

“If you were to transfer your 50% ownership in the home to your child prior to the sale, you would have to file a gift tax return as the value of the gift would exceed the $16,000 annual gift tax exclusion amount,” he said. “Your child would take on your historical cost basis, and even worse would end up with a short-term capital gain if the sale were to occur within a year of the ownership change.”

To get the more favorable federal long-term capital gains rate, the asset must have been held more than a year, Becourtney said.

“If you ultimately end up with a taxable gain from the sale, it can be offset by any capital losses you report from other transactions,” he said.

It’s important to note that these are the general rules, but you should speak to your attorney and a tax preparer about the specifics of your pending divorce agreement and any separation agreement you have.

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This story was originally published on June 27, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.