You’re divorced, sitting in the family home drinking a glass of wine. You think you’ve won. You got the house. Fast forward a couple of years and Johnny has graduated high school and is off to college. You no longer need to live near the high school and you feel like you need a new beginning. You consult with a real estate professional that informs you your house has a market value of $800,000. That’s fantastic you think because your loan balance is $500,000. You list the property and it sells quickly. You have nearly $300,000 to go towards your new home.It comes time to file your tax return and you learn that your property had a basis of $200,000 which is the price you and your EX paid for it several years ago. You re-financed and pulled money out since the purchase and that increased the loan balance to $500,000. You find out you have capital gains of $600,000 and you only qualify for a maximum exclusion of $250,000. You have to write a huge check to the IRS that erodes a large portion of the proceeds.
What went wrong? How did you miss this?It was missed during the divorce. Part of the strategy with the family home should have been to consider your intentions to sell after Johnny was out of high school. Had you indicated your intention in your marital settlement agreement and kept your EX on title for a couple of years, you both may have qualified for a $250,000 exclusion for a maximum of $500,000. Sure it takes some cooperation and advance planning, but we are talking about tens of thousands of dollars here. I recommend planning your exit strategy with your legal council, tax professional, and financial planner, and a certified real estate divorce specialist® so you can prepare for what the future holds and also structure your settlement with favorable tax consequences.For more information on Divorce and Real Estate, and Taxes, download Publication 523 (IRS), familiarize yourself with it, and ask your divorce professionals for assistance.
Life is too short to drink bad wine or pay for unnecessary tax consequences as a result of a lack of planning.
Think of all the wine you can buy with the savings.