DIFFERENCE IN CAPITAL GAINS/SHOULD YOU SELL BEFORE OR AFTER YOU DIVORCE?

You’re getting divorced. You own a house together. You need to sell it. You know there’s probably going to be some tax consequences. What do you need to know? What are the consequences? And when do you sell the house?  

I understand the challenges of selling your house due to a divorce. Divorce can be rough. Even when it’s amicable, it sucks. Let’s be real, getting divorced and selling your house, are probably the two most stressful things in life, and if you have to do both at the same time? It can be overwhelming. Oftentimes the challenges are not with the sale of the house itself, but all the other stuff. Yes, you want to address the situation and deal with it, but you shouldn’t move so fast that you miss the super important details, like this one. Plus, by catching details like what I’m going to go into, you’ll both come out ahead with less stress. 

First, a disclaimer, I’m a realtor, not a professional tax accountant or a lawyer. Make sure you check with them for the exact details of your situation. 

Anytime you sell a house, and there is a profit made, you’re going to be hit with capital gains taxes if that profit is over a certain amount. In California, this tax rate is pushing 40%. That’s a lot of money, and when you’re selling due to a divorce, your timing matters. Why? Because in real estate, when you sell your primary residence, there is a capital gains tax exemption of up to $250,000 per person if you’re single. With married couples, each partner gets an exemption for a total capital gains tax exemption of $500,000. It’s possible that if the house is sold after the divorce, you could lose a $250,000 exemption, meaning that there’s going to be an extra $100,000 in capital gains taxes. Additionally, to get this exemption, you would have had to live in the house for TWO of the past FIVE years. If you’re filing together, or even filing separately, you can still get the $500,000 tax exemption. But, if you’re filing separately, each partner can still claim their $250,000 tax exemption so long as you meet the “2 out of the last 5 years rule.” I don’t want anyone to make mistakes or lose $100,000. You don’t need more stress, but you should absolutely consult with someone before starting to do anything. The bottom line is that you want to preserve the entire capital gains tax exemption, so make sure to plan out your divorce and sale of the house so that the entire $500,000 exemption remains in place. This is super important. 

Understanding the market that you’re selling in will guide some of your selling choices. Also, feel free to contact me if you are in a divorce situation. One of the 12 educational designations that I have is ‘Divorce Real  Estate Divorce Specialist designation so I am very well versed on the best practices when selling during a divorce. My team and I would be happy to help walk you through all your options and to help you find the best solution that will work for you should you find yourself in this position. Feel free to reach us at 858-336-1114 or [email protected].