Improvements in the housing market mean that more couples again have equity in their homes. Division of marital property is one of the challenges in any divorce. When a marital home will be too expensive or more than one spouse can maintain, selling the home is again becoming an option. The sale of a home can result in a sizeable profit, but consider the tax consequences and timing of the sale.
In Pennsylvania, the court equitably divides property in a divorce action by reviewing certain factors including some of the following:
- The duration of the marriage;
- Age, health and sources of income available to each of the spouses;
- Contributions or dissipation of assets made by each party; and
- Whether there are any minor children.
Equitable division does not always mean an equal award of the equity in the home. If one of the spouses owned the home prior to the marriage or sold a previous home prior to the marriage to secure a down payment, part of the equity may be considered non marital. This means it would belong to the spouse that brought the asset to the marriage and would not be divided.
While a divorce is pending, the court can award one or both of the spouses the right to continue to live in the martial home. When it is not practical for either spouse to stay in the home, the spouse who lives in the home may need to list the home for sale.
Tax consequences of the sale of a principal residence
When certain rules are met, the seller of a principal home can avoid paying federal income tax on up to $250,000 ($500,000 for a married joint-filing couple) of the gain in value. When a couple has owned a home for many years in an area that has appreciated this becomes very important.
The Internal Revenue Service test requires that the seller owned and used the property as a principal residence for two years during the five-year period preceding the sale. To pass the joint-filer test, both spouses must pass the use test and one must pass the ownership test.
This is very straightforward when the sale occurs before a finalized divorce decree or within the same year. The couple could file jointly for one more year and claim the $500,000 exclusion.
When a sale of the principal residence happens after the divorce and the court awards the home to one of the spouses, then that spouse may only be able to claim the $250,000 and will owe taxes on any additional gain from the sale.
When considering divorce, contact an experienced family law attorney. Advice at an early stage in the process often means avoiding costly mistakes down the road.