What happens to the family home at divorce?

Some families choose to defer the sale of the family residence to a later time even though their divorce is final. While the Court has discretion to order a deferred sale of home, most of the time a deferred sale of home is the result of a settlement agreement between the parties – meaning that both owners have consented to the delay of sale.

Home-owners are responsible for paying capital gains taxes on any sale of a residence. However, the IRC allows for an exclusion for taxes on up to $250,000 (for single taxpayers) or$500,000 (for married taxpayers filing jointly) from the sale of the principal residence.  IRC 121.

In order to qualify for this exclusion, the family home must be used as the primary residence for 2 of the last 5 years and the full amount can be claimed only if there was no other sale for which a §121 exclusion was claimed within two years prior to the sale date. For joint filers to obtain the full exclusion, the home must have been owned by one of them for at least two of the five years before the sale, both spouses must have used the home for two of the last five years.

For a home that is received in a §1041 transaction, the spouse may count the joint ownership time towards his or her eligibility for the exclusion.

Even if a spouse has not lived in the home for 2 years, you can preserve the $500,000 exclusion by signing and executing a Stipulation that grants one spouse the exclusive use of the home under a court order and has both spouses on title. This is called a “Duke” order and the “out-spouse” is credited with the time the other spouse has exclusive use. Make sure to specify the duration of this order because only the time pursuant to a written agreement or order will be considered under this rule.

If it’s been more than 2 years, you can re-qualify for the exclusion but the house must be held by the parties for at least 2 more years for the out-spouse to re-qualify for the exclusion.

Keep in mind that this may not apply in the case of a “bird- nesting arrangement”. This is because under §121, one party must be granted use of the property under the divorce agreement.   

Even if you did not create a written agreement, you still may be in luck. A taxpayer can qualify for a partial exclusion if they cannot meet the two out of five year requirement due to an “unforeseen circumstance”. A divorce or separation under a qualified agreement is considered an “unforeseen circumstance.”  

If you are interested in learning more about nesting you can contact me at Amanda@gordonfamilylaw.com for more information.