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There’s no doubt about it—the lengthy pandemic has put a strain on marriages. While some folks are grappling with job loss and making ends meet, others are trying to juggle the demands of working from home, childcare, and homeschooling—often in tight quarters. For unsteady couples, the shutdowns may be making tensions worse. And some folks may even be heading for a post-pandemic divorce.
We get it—things are tough right now. If you’re struggling to get through the day, it may feel insurmountable to think about the future. But if you’re on the verge of divorce, there are steps you can take to slash your tax bill later—particularly when it comes to selling your home, which often happens when couples split.
Tax break for profit on your primary home
Let’s say you bought your primary home several years ago. With property values still going up in some places, your home may be worth more now than when you first bought it. That’s a good thing, but there’s also a downside. If you sell your home and make a profit, you may have to pay extra taxes on the money you made—a.k.a. the capital gain. The tax rates for capital gains generally range from 0% to 20%, depending on your income.
The good news is you may be eligible for a tax break. If you qualify, you won’t owe capital gains taxes on the first $250,000 of profit if you’re single and $500,000 if you’re married. There are some rules to qualify for the tax break, though.
How to qualify for the tax break
To qualify for the tax break, you must pass two tests. You have to own the home for two of the five years before you sell it. If you’re married, either you or your spouse must pass the ownership test. The second rule is a residence requirement. The home must be your primary residence—not a vacation property—for two of the past five years before closing on the sale. To qualify for the full $500,000 tax break, both spouses must pass the residence test.
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You can read the complete eligibility rules in more detail here.
Why your separation or divorce agreement matters
If one of you stays in the home, and you sell it several years later, it may be tough to pass the residence test. There’s a way to get around that, though: Your separation or divorce agreement must specifically state that it’s allowed—which may be easy to leave out. Skipping that verbiage could be the difference between a $250,000 or $500,000 future tax break. For more guidance, speak with a local attorney with tax expertise.
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