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DIVORCE AND THE MARITAL HOME IN NEW YORK STATE

By: Janice Page, CPA, MBA

 

The marital home is often the largest asset of the marriage and linked with many emotional issues.  All these emotional and financial issues must be considered before its distribution is finalized.  The financial points that need to be addressed are listed below and are organized in the following manner: The Sale of the Home: tax issues, equitable distribution issues to be considered and planning points; Mortgage Interest and Real Estate Taxes: tax issues and planning points.               

SELLING THE MARITAL HOME- tax issues

1-If husband and wife have lived in and owned their primary residence 2 out of 5 years from the date of the sale, then they may exclude the first $500,000 of gain from taxable income.  If they are already legally separated or divorced and filing as single or head of household, and title is one name, then the gain exclusion is $250,000.  The ability to use this provision is limited to once every 2 years, with certain exceptions.  If gain exceeds these limits, or the gain was earned in less than 1 year at the time of sale capital gains rules apply. 

2-If spouses have joint ownership of the marital home and one moves out giving exclusive possession to the other spouse, the departing spouse can take advantage of the tax benefits as mentioned above when the house is sold.  Also, if the house were transferred to the remaining spouse from the departing spouse, the remaining spouses holding period includes the period that the transferor-departing spouse owned the property. 

3-Where a husband and wife own and live in separate residences, each spouse is entitled to a separate exclusion limit of $250,000 on the sale of his or her residence. If both residences are sold in the same year and each spouse met the ownership and use test for his or her separate residence, two exclusions may be claimed (up to $250,000 each), either on a joint return or on separate returns. 

4a-If a home is transferred between 2 spouses within 1 year of divorcing, and it is incident to a divorce, no gain or loss is recognized. The transferor's basis for the transferred property is carried over to the transferee.  This nonrecognition treatment is not available to spouses or former spouses who are nonresident aliens. 

4b-If you received your home before July 19, 1984, in exchange for your marital right, your basis in the home is generally its fair market value at the time you received it. 

5-If a couple is forced to sell their principal residence before meeting the 2 out of 5 year ownership and use tests because of a change in their place of employment or health or "unforeseen circumstances", the exclusion is prorated. As of December 2002, the IRS issued temporary regulations that defined divorce or legal separation, among others, as “unforeseen circumstances.”  The IRS allocates the exclusion on a daily basis:  count the lesser of the number of days of use versus the number of days of ownership and divide the sum by 730 days (365 x 2).  For example, if a couple lived in the home 365 days and owned it 183 days the gain exclusion is $125,342(183/730 x $500,000). 

6-The 1997 Tax Act eliminated the prior rules for selling a home that related to deferring gain and the $125,000 gain exclusion for people over the age of 55 years.  However, due to these prior rules relating to the ability to defer gain on the sale of the primary residence prior to 1997, the basis of the home currently owned may be very low.  Look at forms 2119 filed with the IRS for all home sales prior to 1997.  Has gain been deferred?  Don't assume the basis of the home is the cost at which the current marital home was purchased.



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