CAPITAL GAINS EXCLUSION

Is selling your family residence one of the many issues you need to address when separating or divorcing your spouse/partner? 


One of the tax issues that arises is whether or not any capital gains taxes will be due when you sell the family residence.  In her June, 2012 newsletter, Certified Financial Planner, Thea Glazer talks about the considerations and pitfalls you need to watch for.  Thea shares the following information regarding capital gains and how to exclude them:

Capital gain is the profit: difference between the total amount the seller receives and the adjusted cost basis.

Broadly speaking, adjusted cost basis includes the cost you incurred to build or buy your property plus permanent improvements less certain reductions to basis. For more detailed information, see IRS publication 523 “Selling Your Home”.   The current capital gains exclusion amounts are: $250,000 for an individual and $500,000 for married persons filing jointly.

In order to qualify for the capital gain exclusion you must meet two tests: 

1)  Ownership test:  you had to have owned your property for at least 2 of the last 5 years prior to sale; 2) Use test: you must have lived in the property as your main residence for at least 2 of the last 5 years prior to sale. 

Special rules apply for use of a property after divorce.  IRS rules provide that the use test is considered met if the "outspouse" stays on title and the "in spouse" is allowed to live in the house pursuant to a divorce or separtion agreement.  This allows the "out spouse" to tack on the length of time the "in spouse" lives in the house to meet the minimum 2 years requirement.  This allows each party to be eligible for a $250,000 exclusion of the capital gain for a total for both parties of $500,000 of excluded capital gains. 

If title is transferred to the in spouse, that spouse is only entitled to a $250,000 total capital gain exclusion.  If the "out spouse" stays on title, this could impact their credit ratios or potentially reduce their ability to purchase a new house if they have equity tied up in the family residence.  All of these factors should be investigated to determine the best approach to take when trying to limit capital gains taxes.  Be aware that only one capital gain exclusion is available every 2 years.  That means if the "out spouse" uses the exclusion for the sale of the family residence, he/she cannot use the exclusion for another 2 years for the sale of his/her current property.

Make sure you understand what your tax basis is and if any capital gains may be excluded when you are gathering the information you need to make a decision on whether to sell the family residence now, or in the future.

If you have any questions, please contact me and I would be happy to answer any further questions you may have regarding this issue.

Campbell Mediation Divorce Attorney

Mediation is a voluntary cooperative process you can use in a divorce case to resolve your disagreements.  It is a private and confidential method of resolving disputes.  Emotions and communication problems can make it difficult for couples to negotiate directly with one another.  I am an experienced attorney mediator and I can help.  I work with a couple to help them identify issues that need to be resolved, and explore their underlying needs and interests.  I educate them about the legal process and guide them through the settlement process, exploring the alternative solutions with fairness, integrity and impartiality.

In order for divorce mediation to be successful, both parties must be willing to assert their concerns, needs and interests.  Both must be able to listen to each other and be open to reaching a result that is fair to the other.  Parties going through divorce mediation control the decision-making process as they make the important decisions about what is best for themselves and their family.

Mediation is also a cost-effective way to resolve a divorce case.  The average cost of of a divorce case where the parties litigate at family court is $45,000 per person!  Much of this expense is spent on discovery, research, and court appearances that will never be incurred for disputes settled in mediation.  Parties in mediation should each consult with independent lawyers to provide legal advice as necessary and review any proposed agreement before the parties sign it, but mediation typically involves much less attorney time.  Further, in mediation, the parties share the costs of the mediator instead of individually paying for two attorneys and because the parties work jointly with the mediator, issues can be resolved more quickly than with an adversarial approach.

The parties set the pace at which the mediation proceeds.  Parties who would like to resolve things more quickly are not held back by court schedules.  If an agreement is reached through mediation in a timely manner, parties may never need to appear in court.

  I approach each mediation case with several goals:

1. Facilitation of respectful communication between the parties that allows them to safely express what is important to them and why
2. Gaining mutual understanding of each other's differences
3. Full disclosure and open sharing of information
4. Parties working together to define and clarify issues, then seek creative solutions to create a durable agreement that is fair to both parties

Research has found that people have much less resentment towards a settlement when they have participated in the shaping of it's terms.  As an experienced family law mediator, my primary role is to ensure that you remain in control of the decision making process and gain guidance to make informed choices and empowerment to create equitable agreements.  I see myself as a facilitator helping clients through one of the most difficult times in their lives. 

If I can be of assistance to you, please do not hesitate to contact me at (408) 377-2817.  You may also want to look at my web site for more information at www.bloomfamilylaw.com.