When you get divorced your home is often one asset that needs to be divvied out between the two sides. In many cases today, ex-spouses will continue to own their former homes together even after one has moved out. This can make it tricky for the non-resident ex to qualify for the valuable capital gains tax exclusion privilege when the property is eventually sold. To avoid capital gains tax, homeowners typically need to live in the home in two of the past five years. If one ex-spouse lives outside the home for more than three years and the home is sold for a gain, the non-resident ex’s earnings may be fully taxable.
Luckily, this problem can easily be avoided if you include the right details in your divorce agreement. If you’re the non-resident ex, insist that the divorce papers state that, as a condition of the divorce agreement, your ex-spouse may continue to live in the home for as long as he or she wants, or for any other agreed amount of time.
Once that point is reached your home can be put up for sale, or your ex-spouse can buy out your portion. The use of this language allows the non-resident ex to earn “credit” for the continued use of the property. This makes is so whoever is the non-resident ex should be able to pass the two-out-of-five-years use test, so they may qualify for the capital gains exclusion privilege.
Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please feel free to contact me if you have any other questions.