In many cases the marital residence is one of the most valuable assets of a divorcing couple’s estate. Now more than ever couples who are separating are faced with difficult decisions regarding what to do with their marital residence. Traditional options like immediately selling the marital residence or having one party buy the other party out may not be possible or desirable given current economic conditions. Accordingly, some parties are electing to hold on to the marital residence as tenants in common and wait for the market to recover. In such cases, it is important for the parties to understand the responsibilities and potential tax ramifications.
There may be serious capital gains ramifications depending upon the timing and circumstances of a future sale or transfer. In order to exempt up to $250,000.00 of capital gains (or up to $500,000.00 if you are married filing joint), you must satisfy the ownership and use tests. In order to satisfy the ownership and use tests, a party must have owned the home and lived in the home as their principle residence for at least two years during the five year period ending on the date of the sale. Therefore, if Husband and Wife separate and sell their marital residence quickly, they may both still satisfy the ownership and use tests. Assume Husband and Wife purchase property as tenants by the entirety and use this property as their principle residence for two years before Husband moves out and the parties separate. If they sell the marital residence quickly and are still married on the last day of the tax year they both still meet the ownership and use tests and can exempt up to $500,000.00 of capital gains if they file a joint married return.
The treatment of capital gains tax can be drastically different if sale of the property is delayed. Assume that Husband and Wife divorce but continue to own the former marital residence as tenants in common. Following the parties’ separation, Wife lives in the residence for three and a half years prior to its sale. Since they continue to own the property as tenants in common, the gain is reported with each party receiving fifty percent. However, Husband no longer satisfies the use test and will not qualify for the up to $250,000.00 exemption.
The above is just one example of the many tax ramifications which couples may face when deciding what to do with their former marital residence. Accordingly, prior to the sale or transfer of real property you are strongly advised to seek advice from an attorney as well as an accountant with experience dealing with these issues.
You can reach Raleigh Divorce Lawyer Cathy Hunt at CHunt@gwhlaw.com.
For more information contact: Raleigh, North Carolina Family Law Firm, Gailor & Hunt at 1101 Haynes Street, Suite 201, Raleigh, N.C. 27604. Tel: 919-670-2925 or go to http://www.gailorwallis.com
Disclaimer: The information contained in this article is intended as a general guide and is not to be used as legal advice by Gailor & Hunt, PLLC. Whether or not you may be entitled to take action in regard to the information addressed in this article can only be determined after a thorough review of the facts and circumstances of your case. You may contact North Carolina Family Lawyers Gailor & Hunt, PLLC, a full service divorce law firm, at 919-670-2925 or 910-509-7223.