What should a spouse remember if he or she acquires the house upon divorce?
He or she should remember that someday the house may be sold. Spouses who have acquired houses as property settlements sometimes find themselves facing eye-popping capital gains taxes when they sell them later as single people. This is particularly true now that the price of houses have reached stratospheric levels. While a couple, married or divorcing, can shield up to $500,000 from capital gains from the sale of a primary residence, the first dollar above that amount is subject to capital gains tax when the house is sold to a third party for more than the capital gains exclusion.
Moreover, in accepting a house as part of a property settlement, a spouse, particularly a custodial mother (who may be living on a reduced income), should remember that she must maintain the property.
If the capital gains are on the primary residence – which means a couple’s domicile, not a vacation home or vacation condo – a couple can exclude up to $500,000, if married and filing jointly. A single person can claim an exclusion of up to $250,000. This exclusion means that person or couple are not to be taxed on the first $250,000 or $500,000 (whichever applies) of the gain or profit that they receive from the sale of the home.
For a married couple, one spouse must own the primary residence, and both must live in it for a total of 24 months during a five-year period prior to the sale of the property. The ownership and occupancy must be concurrent, and that exclusion may be prorated because of conditions related to "health, employment, or unforeseen circumstances." This exclusion may be claimed once every two years.
Until 1997, a person could claim it once in a lifetime. Now a person can use a capital gains tax exclusion every two years for an unlimited number of times in a lifetime, but the I.R.S. may look closely at a capital gains tax exclusion that is repeated every two years on the same piece of property.