he process of buying a new home is an exciting one for married couples. Unfortunately, when it comes time to sell a house, there may not be such happy circumstances.  When a sale of the marital home involves potential capital gains taxes, understanding the available exclusion tests is crucial. In general, both the homeownership and the use tests must be met in order to qualify for the Section 121 exclusion.  

 Capital gains are taxed by the federal government and by states. 

The current Capital Gains Exclusion on the sale of the primary residence currently allows for a $250,000 individual exclusion. 

Married couples are allowed a $500,000 marital exclusion.  

Read below for more details on Ownership & Use Rules Ownership Rule 

and Tax Rates.     

See IRS exclusion info 

https://www.irs.gov/taxtopics/tc701 

 https://www.irs.gov/taxtopics/tc409

Reduce Capital Gains Tax Using Expenses of Sale

Types of Selling Expenses That Can Be Deducted from Your Home Sale Profit

•  advertising 
• appraisal fees 
• attorney fees 
• closing fees document 
• preparation fees 
• escrow fees mortgage 
• satisfaction fees notary 
• fees point paid by the seller to obtain financing for 
• buyer real estate broker's commission 
• recording fees (if paid by the seller) costs of removing 
• title clouds settlement fees

Deducting Home Improvements from Home Sale Profit for example:  

• adding on to the home, a new bedroom, bathroom, or garage 
• replacing walls and floors
• installing new pipes, or duct work 
• new or upgraded heating and air conditioning system 
• new fences, retaining walls, porches, patios, or decks
• replacing driveways and walkways
• installing a new roof, windows, or doors 
• installing new wall-to-wall carpeting
• installing new built-in appliances.

NOTE: Regular home repairs, however, cannot be included in your list of home improvements.  

Capital Gains Tax When You Sell Your House

The basic formula is simple. 

       Selling price 

     – Selling expenses 

     – Purchase price 

    – Improvements you made 

_____________________

  = Capital Gain (or loss) 

Use our Capital Gain Tax Calculator to estimate your Capital Gain and any potential capital gains tax due.   

What if I sell the property to my spouse because of a divorce, Do I have to pay capital gains? Per the tax code, No, don't worry. Capital gains taxes aren't due because this assumes the asset transfer was a result of the divorce. "Incident to divorce" The Capital gains are exempt.

 Transfers of property between spouses or "incident to divorce"

(a) General rule No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of) 

 (1) a spouse

or

 (2) a former spouse, but only if the transfer is incident to the divorce

 Incident to divorce - a transfer of property is incident to the divorce if such transfer

 (1) occurs within 1 year after the date on which the marriage ceases 

or

(2) is related to the cessation of the marriage.

Internal Revenue Code Section 1041 specifies the rules that apply to property transfers between spouses who are divorcing or divorced. Property transfers that occur within one year of a divorce or in connection with the divorce are treated as incidental to the divorce.

The asset is not subject to taxation and carries over its basis to the receiving spouse. 

Buyout your Spouse during Divorce,

After a buyout, the selling spouse doesn't need to worry about capital gains tax because the sale was part of the divorce. But if you buy out your spouse, stay in the house, and later sell the house to a third party, capital gains tax will apply to that sale.

We can help determine how to calculate buying someone out of a house and how to give equity to a spouse in a divorce.         

Ownership & Use Rules Ownership Rule - 

You may exclude the first $250,000 of gain—as long as you've lived there for two years before selling or meet one of the IRS exceptions to that rule.    

Under the ownership rule, an individual must own the marital home for the individual tax exclusion, or a couple must own it jointly for the marital tax exclusion.  

Ownership can be established in two ways. First, legal ownership of the property can be proven when one or both parties hold title to the property. 

Ownership can be held individually or jointly in various ways.  Ownership in the marital home may also be established through legal marriage.  If a married couple files jointly, only one spouse must meet the ownership requirement. It may be possible to increase the available exclusion to $750,000 if one of the divorcing spouses remarries and the new spouse lives in the home for 2 of the previous 5 years before the sale.     

 It is important to note that if the marital home will be sold in the future, the marital exclusion will be required, and both spouses must remain on the title after the divorce has been finalized. Divorced couples may no longer be eligible for marital exclusion once the chain of ownership has been broken.   

Per the IRS, they generally depend on the taxpayer's marital status as of Dec 31st.  However, more than one filing status may apply in certain situations.

Make certain you are protected. Know your Home's Value.     

 Ownership & Use Test  

The Residence Use Test requires each party to have lived in the home as their primary residence for at least 24 months out of the previous five years.   

During the last five years, you must have lived in the home as your primary residence for two years. The 24 months of residence can fall anywhere within the five-year period and doesn't have to be in one block of time. 

A total of 24 months (730 days) of residence are required during the five years. If a married couple files jointly, they each must meet the residence requirement individually to qualify for the full exclusion.  It is still possible for the out spouse to meet the Residence Use Test even if they have not lived in the marital home for two of the five previous years before the sale, as long as:  

The out spouse retains ownership either solely or jointly, and the former spouse continues to live in the home under a divorce or separation agreement and uses it as their main home.  If ownership in the home is transferred to one spouse without legal ownership via title vesting, ownership in the home may be counted for any time when the other spouse owned the home as time owned. However, each spouse must meet the residence use requirement on their own.  

The Ownership and Use Tests may be met during different 2-year periods. However, both tests must be completed during the five years ending on the date of the sale. Generally, a person is not eligible for the exclusion if they excluded the gain from the sale of another home during the two years before the primary home sale.   

If you are considering keeping the house marital home after Divorce, make sure you know the 6 areas of Risk.

Partial Exclusion of Gain for Divorcing Couples 

When divorcing couples do not meet the Eligibility Test for the Ownership and Use periods, they may still qualify for a partial exclusion. The IRS also allows a partial exclusion of gains for couples who become divorced.  

Come Engage and Learn from Divorce Experts!

 As an example, Sam and Sara purchased a new home in June 2020 for $325,000. In February 2022, they are getting a divorce and must sell the marital home.   

The home is currently valued at $475,000. Their capital gain will be $125,000 after they deduct the cost of selling the home.   

The standard rule for using the capital gains exclusion requires that Sam and Sara must have lived in the home for 2 of the last five years; however, in their case, they have only lived in the house for 20 months.   

Therefore, Sam and Sara may use a prorated capital gains exclusion equivalent to 20/24 or 83% of the available exclusion amount. It is recommended that they speak with a tax accountant to verify their prorated exclusion. 

 Every co-owner, married or not, can claim a $250,000 exclusion, if other conditions apply.  

Answer: Each Co-Owner Can Deduct Up to $250,000 for Capital Gains Tax Purposes

This exclusion is most often described or used by either single owners or married couples, but you don't have to be married, or a couple, to qualify for it. Unmarried co-owners can also use the exclusion. 

For example, if a home is in fact sold for a $350,000 gain, one-half of the gain—or $175,000—will be allocated to each owner. 

Each owner can exclude up to $250,000 of gain on his or her individual income tax return, so no tax would be due on any of the gains. 

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts. 

A 3.8 percent Net Investment Income Tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts. This is a Federal tax. 

Individuals

In the case of an individual, the NIIT is 3.8 percent on the lesser of:

• the net investment income, or
• the excess of modified adjusted gross income over the following threshold amounts:
  • $250,000 for married filing jointly or qualifying surviving spouse
  • $125,000 for married filing separately
  • $200,000 for single or head of household

The Net Investment Income Tax went into effect on Jan. 1, 2013. The NIIT affects income tax returns of individuals, estates, and trusts, beginning with their first tax year beginning on (or after) Jan. 1, 2013. 

 The NIIT is applied to the lesser of net investment income or modified adjusted gross income minus the income threshold. Modified adjusted gross income (MAGI)  

There are several options that spouses need to consider when deciding on what to do with the family house.  Real Estate and Divorce what are the options?  If you are interested in learning more about an Owelty lien and if you are thinking about divorce, contact us today. Do you know if the house is Separate or Community Property?  

  Short term capital gain?

 Short-term capital gains refer to profits earned from the sale of an asset that has been held for less than a year. They are taxed as ordinary income, typically at a higher rate than long-term capital gains, which are earned from assets held for more than a year. The tax rate for short-term capital gains is determined by the individual's tax bracket 

What is separate property in Texas?

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