I’m divorced. Which capital gains exclusion do I get for my home sale?

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Q. My husband and I originally purchased my home in 1980. After our divorce in 1992, the courts deemed that I could buy him out 10 years later for a set amount. My question is: if I were to now sell my house in 2023, at what point would my capital gains begin? Would the exemption be $500,000? At what point would the single status kick in? Would both shares of house value be considered back in 1992?
— Seller, I think

A. It’s a great question.

First let’s review how your home’s cost basis is calculated.

In your case, the initial cost basis of the home was the 1980 purchase price plus capital improvements made up until the point of your divorce, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

More broadly, when a couple divorces, the home’s cost basis is subject to a rule known as the “carryover cost basis” rule.

“The `carryover cost basis’ rule simply means that the recipient of the house in a divorce keeps the original cost basis in the house, Maye said.

For example, if a wife receives a home worth $800,000 in a divorce but the cost basis was $400,000, she keeps the $400,000 cost basis, he said.

“This highlights the importance of negotiating the divorce settlement to include the tax implications,” Maye said. “Post-divorce, the cost basis would be increased for any capital improvements done post-divorce.”

Next, let’s review the home sale capital gain exclusion rules.

To qualify, a homeowner must meet the ownership test and the use test.

“You need to own and occupy the home as a primary residence for 2 of the 5 past immediate years,” he said. “Also, the home sale capital gain exclusion is limited to once every two years as well.”

The exclusion for qualified homeowners is $250,000 filing single and $500,000 married filing jointly, he said.

“So, if you are now single and the home qualifies, you would be entitled to a $250,000 capital gain exclusion,” he said. “Whether you are single or married will be determined on your filing status at the point you go to sell the house.”

Also, if you are married when you go to sell the home to get the full $500,000 home sale exclusion, your spouse would also need to meet the use test to get full $500,000 capital gain exclusion, he said.

“There are nuances to the capital gain exclusions so I highly recommend you consult with your own personal tax advisor who can provide a personalized answer based on the particulars of your unique situation,” he said.

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This story was originally published on Nov. 16, 2023.

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.