There are emotional and financial challenges involved with any divorce, but some parties will also need to incorporate strategies for tax matters when ending their marriage. Specifically, there can be taxable events and other tax-related issues that arise with the division of marital property.
The different transactions and ownership changes that result from a dissolution of marriage may trigger the Internal Revenue Code section on capital gains and losses, particularly related to the marital home. Without proper planning and attention to detail, you could end up paying more than you should to the IRS.
As such, it is critical to understand how and the division of assets in a divorce can trigger tax implications. You can count on a Chicago property division attorney to advise you on how to reduce capital gains tax selling the marital home, but a summary is useful as an overview.
Understanding Capital Gains Taxes
Whenever you sell real estate and other qualifying investment assets, US tax laws apply to the gain or loss. The tax is imposed only when you divest, regardless of how much the property may increase in value while you hold it. Therefore, the two key dates for purposes of capital gains taxes on the marital home are the day you purchased and the day you sell.
Transfers of marital property between parties who are divorcing are tax-free. However, when one party receives the home through the proceedings and then sells it later, the transaction may be a taxable event. Fortunately, tax laws provide for an exemption to capital gains. A single taxpayer can exclude up to $250,000 while married couples can exclude a total of $500,000.
Strategies for Reducing Capital Gains in Divorce
As an overall strategy, compromise is the most effective way to reduce capital gains tax when selling the marital home. By being aware of the need to control the timing of the sale, you can take advantage of getting the highest exemption amount. Thus, this can benefit both parties. Often, the easiest and most efficient tactic is to sell the marital home before you finalize the divorce. For instance, if you believe your divorce case will conclude in 2023, you might consider selling in 2022 when the IRS still considers you married, allowing a $500,000 exemption versus only $250,000 post-divorce.
Other rules govern the tax implications of selling a home. For example, you must have owned and resided in the house for at least two of the last five years to qualify for the capital gains exemption.
Consult with a Chicago Property Division Attorney About Tax Matters
When you have skilled legal advice on how to reduce capital gains tax selling the marital home, you are in a better position to retain more of the sales proceeds. To learn more about the implications of the division of marital property, please call (312) 621-5234 to set up a consultation with Chicago property division lawyer Michael C. Craven. We can explain tax implications and related laws after reviewing your circumstances.
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