If you are like many Californians, your home is one of the more valuable assets you and your spouse own. When going through a divorce, of course, you must address ownership of all marital property. This likely includes your house.
Keeping your home may be one possibility. If you buy out your soon-to-be ex-spouse’s ownership, however, you may have to pay capital gains tax. Consequently, before making any house-related decision, you probably want to weigh all possible tax implications.
The capital gains tax
A capital gains tax is merely a tax you pay on certain profits from the sale of property. While there are exemptions and other rules, you likely do not have to pay capital gains tax on a primary residence you have occupied for at least two years out of the previous five.
Still, you are typically only free from the first $250,000 of capital gains. During your marriage, your spouse is also eligible for a $250,000 exemption. This results in a marital exclusion of $500,000.
An ownership buyout
If you give your spouse enough money to buy out his or her ownership interest, your spouse likely does not have to pay capital gains tax. When you eventually sell, you probably do. Even if the house is still your primary residence at that time, you may only be eligible for a $250,000 exclusion.
Naturally, capital gains tax is only one consideration when deciding whether to buy out your spouse’s home ownership interest during a divorce. Before negotiating an ownership buyout, you must also consider the mortgage, your budget, utilities and other factors.