Q – My wife and I are getting a divorce. As part of the property settlement, she will be keeping our home. What are the possible tax consequences that may arise?
A – When property is divided in a divorce, there are no immediate tax consequences. Therefore, the transfer of your interest in the home to your spouse will not result in a taxable gain or loss to either you or her. However, tax rules say that she assumes the home at the community basis. Generally, community basis will be what you jointly paid for the home plus the cost of any improvements you’ve made since. Thus, she would be responsible for reporting any gain in excess of the community basis when and if she chooses to sell the home. If she qualifies, she can exclude the first $250,000 of gain; any portion of the gain in excess of the exclusion will be taxable to her. As part of your divorce tax strategy, and assuming you qualify for the home gain exclusion, you may want to consider selling the home jointly. This will convert the asset to cash, which can then be divided up as part of the settlement. By doing so, you will have a combined $500,000 home gain exclusion and will only be taxed on the amount, if any, in excess of this larger exclusion amount.