Am I qualified for a partial exclusion of capital gains tax due to a divorce?

Am I qualified for a partial exclusion of capital gains tax due to a divorce?

by John R. Steffee, CPA | Jan 25, 2018
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Am I qualified for a partial exclusion of capital gains tax due to a divorce? I sold my home in 2017 due to a divorce. We owned the home for about 22 months, and walked away with $36,000 that we split evenly.

Current tax law allows many individuals to exclude the gain from the sale of their personal residence. The exclusion is limited to $500,000 for individuals who file as married filing jointly and $250,000 for those who file as single or head of household.

You must have used the home as your personal residence for two out of the past five years to qualify for the exclusion. However, there are reduced exclusion rules that apply to taxpayers who use a home as their personal residence for less than 24 months. Qualifications for a reduced exclusion include a change of employment, significant changes in health, or unforeseen circumstances after you purchase the home. Divorce and legal separation are part of the unforeseen circumstances that qualify for a reduced exemption.

Since it appears you are now divorced, it also seems as though you will file your federal individual income tax return either as head of household or as single. Therefore, your basic exemption for the gain on the sale of your personal residence will be $250,000. You did not use the home as your personal residence for the entire 24-month time period, therefore your exclusion amount will be reduced pro rata based on the actual time you used the home as your personal residence.
 
Since you used the home as your personal residence for 22 months over the past five years, you qualify for a reduced exemption of $229,167 (or 22/24 x $250,000). This reduced exclusion still far exceeds the actual gain you realized. Congratulations—none of the gain from the sale of your home will be taxable on your federal individual income tax return.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: John R. Steffee, CPA, is with Simon Lever LLP in Lancaster, Pa.

Disclaimer
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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