The disposition of the marital home is oftentimes the most pressing financial issue in a divorce case. The current real estate market brings tax issues to the forefront which must be given consideration. When negotiating a settlement, (or preparing for trial) it is important to understand the tax consequences of the disposition of property. Too often, parties simply think they are just going to divide assets at the value that they have today on a statement rather than understanding the tax affected value. One area that has to be carefully considered is the marital home.
As a general rule, when you sell your primary residence, you can make up to $250,000 in profit if you’re a single owner, twice that if you’re married, and not owe any capital gains taxes. However, in the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence.
In a matrimonial action, and in particular, in a long marriage where the parties have owned a house for many years, this rule can have a profound affect on a party who has not been living in the house while the action has been pending. Add to this a real estate market that us sluggish and in which houses are taking years to sell, a settlement that says the parties shall “sell the house and divide the proceeds equally”, can really result in an unequal amount to the parties after taxes if one parties pays a substantial capital gains tax and the other, who has been living in the house pending sale, does not. SO, if you are going to let one parent stay in the house for the next six years until junior finishes high school and the real estate market hopefully bounces back, make sure you have considered the possible tax consequences.
Capital gains of course, are not limited to houses. The same concern exists for investments and any other assets that have increased in value. So if Jane is going to get the AT&T stock that was a wedding gift 25 years ago and worth $100,000 today and John is going to get the money market account with $100,000, it’s really not an equal distribution of assets, because Jane is getting an asset that is going to be taxed.
The above examples are meant to stress the importance of understanding the effect that taxes can have on a distribution of assets and the importance of getting sound advise from your attorney and accountant or other tax professional prior to signing any agreement.