• The home was your main (principal) residence.
  • You lived there for two of the past five years.
  • You only use the exclusion once every two years.

Spouses who haven’t lived there for two of the past five years (perhaps because of job transfer or military deployment) might be eligible for a partial exclusion of the gain. You’ll find more information on those in Publication 523.

 

4.  You continue to share the house. 

Some couples who share custody of their children want to avoid having the kids shuffle between the parents’ two homes. The kids stay in the original house and the parents take turns living with kids some weeks and living in a second home or a rental during the other weeks.

The tax repercussions depend on whether you still consider the main home to be your principal residence. If, for example, you still get your mail there and keep it as your address for your driver’s license, it would likely still be counted as your home for tax purposes.

 

5.  You have a vacation or second home to divide.

You don’t get that lovely home sale profit (capital gains) exclusion when you sell a vacation home, so you’ll likely owe tax if you make money from selling a vacation home due to a divorce.

Capital gains tax varies based on your income. Most people pay 15% in capital gains taxes on their vacation home sale profits. Low-income sellers might pay no capital gains taxes, while those earning more than $406,750 would pay 23.8%, including the 3.8% surtax on net investment income.

If you don’t sell and instead get your spouse’s share of your vacation home, you won’t have to pay taxes on the transfer as long as it’s part of your original or modified divorce or separation agreement.

Maybe you can continue to share your vacation home with your ex-spouse and work out a written usage agreement as part of your divorce. You could each use the home 26 weeks of the year, for example.

 

6.  You own rental properties.

In general, if you give or receive a rental property as part of your divorce agreement, you won’t owe income taxes because of that transfer. But the spouse who sells the property in the future might owe tax on the recaptured depreciation that you both took in the past.

Depreciation is an annual allowance real estate investors get for the wear and tear, deterioration, or obsolescence of a property. When investors sell a property, they owe taxes on the depreciation they deducted in prior years.

Ask your accountant how the depreciation you both claimed might be recaptured and whether there are ways to avoid paying tax on recaptured depreciation.

For more information about investment property transfers in divorces see IRS Publication 504.

 

Three Caveats

There are three important exceptions to the six situations for divorcing homeowners outlined above:

  1. They don’t apply if your spouse is a nonresident alien.
  2. Properties held in trust follow a different set of tax rules outlined in Publication 504.
  3. Property you got in a divorce agreement that happened before July 19, 1984, falls under a different set of IRS rules outlined in Publication 504.

 

One-Off Property Situations for Divorcing Couples

Although most people will find themselves in one of the six situations discussed above, other home-related tax complications can arise from divorce, especially if you continue to have a joint mortgage on a home that only one of you continues to own and/or live in. Here’s how the taxes play out for some of these one-off situations:

 

You used the first-time homebuyer tax credit.

Whichever spouse keeps the house is responsible for potentially repaying the first-time homebuyer tax credit if relevant. File Form 5405 to let the IRS know you don’t own the house anymore because of your divorce.

 

You pay the mortgage but don’t own the house.

Sorry, you can’t deduct the mortgage interest unless you own the home.

 

You don’t own the home and your ex pays the mortgage.

Sorry, you can’t deduct the mortgage interest unless you own the home and pay the interest.

 

You own the home but your ex pays the mortgage.

You report the mortgage payment on your tax return as alimony income and you then get to deduct the mortgage interest payment on Schedule A of Form 1040 if you itemize. You have to be legally obligated to pay the mortgage to be able to take the mortgage interest deduction.

If your lender sends your spouse (instead of you) Form 1098 (the form that proves to the IRS that interest payments were made), put a statement in with your tax return telling the IRS:

  • You own the house
  • Who the 1098 went to
  • Where the 1098 got mailed

You both own the home and you both pay the mortgage.

If both spouses own the house and contribute to the mortgage payment, but only one of you lives in the house, you each deduct the mortgage interest you pay. To take the mortgage interest deduction, you have to own the home and be legally obligated to pay the mortgage.

Each of you should include a statement with your respective returns, noting that you pay a share of the total interest shown on Form 1098.