How to Deal With Taxes When Getting a Divorce
No matter how you cut it, divorce and taxes are two things nobody likes. However, filing taxes after divorce is an essential consideration.
Divorce is not an easy process for anyone to go through, no matter how straightforward it is.
One of many potential complications in dissolving a marriage is what to do with the home you own together.
One of the most common questions is what to do with the divorce and selling my home.
Whether you choose to sell it and split the proceeds, for one of you to remain in the house and pay the mortgage – possibly to raise your children – or buy out your spouse, you will still need to know your tax situation.
Whatever you decide, it is essential to remember that there are tax obligations that you will be expected to deal with.
One of the most important financial considerations is filing taxes after divorce!
As a Realtor who has dealt with divorcing homeowners throughout my thirty-eight year real estate career, I would highly recommend educating yourself on the tax consequences of divorce.
Not understanding divorce tax laws could cost you a significant amount of money.
Read on to see some of the best tips for divorcing homeowners. The advice comes from years of experience representing home sellers and going through a divorce myself.
Facts to Know
1. After a divorce, you may need to change your filing status from married filing jointly to single or head of household.
2. Child custody agreements can impact who claims the children as dependents for tax purposes.
3. Alimony payments received are generally considered taxable income.
4. Updating your personal information with the IRS, such as your name or address changes, is essential after a divorce.
5. Consult with a tax professional or use tax software to ensure you understand and comply with the tax implications of your divorce.
After Divorce, How Do You File Taxes?
Knowing how to file taxes after divorce is crucial!
Your marital status after the fiscal year dictates how you submit your tax return. If you have been divorced by midnight on December 31, then be sure to file separately from your ex-spouse.
When you are the custodial parent for your kids, you may qualify for the advantageous head of household status. If not, you’ll file as a single taxpayer even if you were married for part of the tax year.
When you file taxes after divorce, it is crucial to understand the tax implications if you have children.
Child support is not tax-deductible to the party who pays it, and alimony payments will be tax-deductible only if your divorce has been finalized by the end of 2018.
Similarly, if you received an alimony settlement before December 31 of that year, it must be declared on your income tax return. However, there’s no requirement for a parent to report child support as income.
If you interlinked your assistance into a familial support arrangement in your contract, it is taxable to the recipient and deductible for the payer as if it’s alimony.
Taxes and Divorce Have Changed
The spouse paying alimony can no longer deduct the alimony paid. The person receiving alimony will not claim the alimony as income if the divorce is finalized after December 31, 2018.
The rules on tax deductions changed as a result of the passage of the Tax Cuts & Jobs Act of 2017. Divorces finalized before 2019 are grandfathered under the old rules.
When a divorce settlement doesn’t spell out who can claim the children as dependents, the custodial spouse gets claiming rights.
When there is joint custody, the spouse who has the children the most days during the tax year is awarded the right the claim them as a dependent.Click To TweetUnderstand The Head of Household Tax Deduction
When you are single on the last day of the year, legally separated or officially divorced, as a Head of Household, you may be eligible to claim a higher deduction than filing as a single status.
You can claim Head of Household when you have a qualifying dependent and provide over half the support.
For the tax year 2024, the standard deduction for single filing status is $14,600. With the Head of Household Status, it jumps to $21,900.
Who Claims the House on Taxes After Divorce?
Usually, the spouse who proves they were the ones primarily responsible for paying the mortgage and property taxes from their funds is the one who gets the right to claim the deduction.
It’s easy when one spouse is the breadwinner. It is far more challenging when spouses have equal earning and payment capacities.
When neither spouse can prove their contributions to the property expenses are more significant, the IRS might allow each spouse to claim half of the deduction.
6 Tax Scenarios For Divorcing Couples That Own A Home
1. One Spouse Buys The Other One Out.
Understanding how to buy someone out of a house is crucial.
You or your spouse may want to keep the house free and clear of obligations to the husband or wife who is leaving.
Say you want to maintain the house and pay your spouse for their share of the home. You and your spouse can agree to a fair price. It does not have to be precisely half the home’s value if you do not want it to be.
Many divorcing couples decide on a buyout price that reflects each other’s circumstances, such as each spouse’s income and who takes care of the children.
You should consult a Realtor or real estate appraiser to price the home and determine the number for a buyout. The spouse who keeps the house will most often refinance it, but this is not always how people choose to do it.
Again, it will be up to you and your spouse. In most cases, you will not need to pay taxes related to the buyout. If you are the spouse leaving, you should get written evidence for your records that the mortgage was paid.
2. You Both Sell The House and Split The Proceeds.
This is one of the most common decisions following a divorce. You can find a Realtor with the divorce experience you trust to list the home, and then you and your spouse can split the profit from the sale in whatever way you see fit.
When you sell a home that is your primary residence, you can walk away with up to $250,000 tax-free if you’re filing your taxes alone and up to $500,000 if you and your spouse are filing jointly.
Remember to prove the home was your primary residence for at least two years of the last five years to qualify for the tax-free status.
You can only use this benefit once every two years, so it may not work if you have sold a home recently. For a complete understanding of how the real estate capital gains tax laws work, I highly suggest reading this comprehensive article that explains the tax ramifications of selling a home.
Understanding The Value of Your Home is Essential
Regarding selling the home, both parties should clearly understand what the house is worth. Understanding proper pricing is one of the most important keys to selling real estate.
One issue I discuss in the article above is picking a real estate agent who has experience with divorce and is highly regarded when pricing homes correctly.
Careful research should be done when hiring a Realtor in divorce. Given the fact there will be some split of the divorce proceeds, it makes sense to choose an agent who will be spot on for the value.
Pricing a home is a skill and art that many real estate agents do not possess. Look for an agent who consistently comes close to the ratio between the initial list price and the home’s final sale price.
Real Estate agents should provide a comprehensive comparative market analysis of comparable sales.
Careful considerations should be made in pricing the home based on both spouses’ goals. Do you both want out immediately?
If so, a more aggressive approach might be taken. This should be discussed before ever meeting with any real estate agents. Make sure you are on the same page with your ex!
3. One Spouse Stays in The Home With The kids; Then You Sell
Some divorcing couples choose to retain the home until the kids are grown.
However, there is a tax problem that can come from this decision that you should be aware of – especially if you are the one who is moving out of the house.
As mentioned above, you can sell your primary residence and keep up to $250,000 in profit if you file singly.
But to qualify, you have to have lived in the home for two of the last five years, a qualification you may not meet if you are the one to leave the house.
Fortunately, this problem has a solution; you must be aware of it and take the proper steps.
When you get divorced, you must have your attorney write in the divorce co-ownership agreement that your spouse will use the home while you live elsewhere.
In the agreement, you must state that the house is still considered your main home for tax purposes.
To avoid a substantial tax bill, you must have this documentation for the IRS when you finally sell the home.
The spouse remaining in the home continues to receive other significant tax benefits of owning a home. Understanding these tax perks is essential, especially when it comes time to file your taxes in April.
There are some substantial advantages that homeowners get over renters. Often, these benefits are forgotten about. This, of course, is like throwing money out the window!
It is always important to brush up on current tax laws as they can potentially put thousands of dollars in your pocket.
4. You and Your Spouse Share The Home.
If you and your spouse agree to share the house for your children’s stability, your tax obligations will depend on whether the home remains your primary residence.
As mentioned above, when you sell, this situation has tax advantages. If you continue to have your mail sent to the home, you can probably still list it as your residence for tax purposes, even if you spend some time at another property due to your sharing schedule with your ex-spouse.
This, of course, would only be for the brave of heart. Do you want to be under the same roof with someone you no longer wish to be with?
While this may seem like a brilliant financial idea, it could be very stressful to your emotional health. This is something that should be given strong consideration.
5. You and Your Spouse Own Rental Properties.
Because rental properties are not your primary residence, the tax issues they bring up will be different than with your main home. Taxes in divorce become a crucial consideration when there are multiple properties involved.
Although you can transfer the assets to one spouse or the other without tax repercussions upon divorce, there will probably be taxes owed when one spouse sells the properties.
If you are dealing with rental properties in your divorce, consult an accountant to decide the best action. Here is an excellent reference from the IRS that speaks to the issue of taxes on community property, which can apply in divorce.
6. You Have a Vacation Home.
Another vital tax tip when getting divorced is thinking about what to do with a vacation home if applicable.
Because they are not primary residences, vacation homes do not qualify for the same tax exemptions as regular homes.
When you sell the vacation home because of the divorce, there will probably be capital gains tax to pay. How much this tax is will depend on your income.
As with owning rental properties, when dealing with the division of extra property like vacation homes, you would probably benefit from talking to an accountant and a divorce attorney who has experience dealing with these kinds of financial issues.
Before 2008, you could exclude profits of $250,000 if single and $500,000 if married from capital gains tax on selling a second home due to The Housing Assistance Act.
This legislation was primarily implemented for investment properties, but vacation homes could be counted as such.
However, you might qualify for a partial exclusion if you lived in the residence for two years or more and treated the property as an investment property the rest of the time.
For example, if you owned the home for a total of five years, and if you rented it out for the first three years and then moved in yourself for the remaining two years, you might be able to exclude 40 percent of your profit from capital gains tax because the property was used as your primary residence for 40 percent of the time.
Again, you should consult a tax specialist because everyone’s circumstances differ.
How do You Avoid Paying Taxes on a Divorce Settlement?
One of the common questions asked is whether you pay taxes on divorce settlements.
In most instances, separating couples do not incur any tax liabilities on real estate transfers due to divorce. These provisions come under U.S.-based statutes such as Section 1041(a) and 2516, respectively.
According to Section 1041(a), the IRS does not require any taxes when a property is transferred between former spouses if such transfer arises from a divorce.
Any property transfer is assumed to be linked to the divorce so long as it’s either called for in the divorce settlement or if it takes place within one year of the end of the marriage. It doesn’t apply to alimony.
Consequently, ex-spouses are afforded one year from their marriage’s termination, even without a formal agreement, to settle any arrears with tax-free transfers. In this instance, the IRS views all property exchanges as non-taxable gifts.
If a real estate transfer is required within the divorce settlement, you have up to six years from its conclusion to make it. Beyond that point, regardless of any terms agreed upon in the divorce proceedings, IRS criteria will typically classify such an intermingling of property between two unrelated parties.
Section 2516 empowers couples to make arrangements for their marital assets two years before the divorce settlement. This can allow them to settle on a plan that best suits their circumstances.
The code also allows you to make additional written arrangements for one year after the final divorce.
This refers to a situation in which you voluntarily relinquish something of value. As a result, you are rewarded with an equivalent value in exchange. As such, neither party faces any tax liability on the property.
Other Considerations For Taxes After Divorce
When getting a divorce, you should understand how tax laws work when selling your home. Your divorce settlement is going to take into consideration a whole slew of things.
Tax laws are further complicated when there are kids, as you have learned from the information on alimony and child support.
Now that your divorce is finalized, you can start considering buying a house after the divorce. Take it slow before making any decisions.
Can You Deduct Divorce Attorney Fees From Your Taxes?
No. Legal fees stemming from a divorce are not tax deductible. Before 2017, deducting some divorce attorney fees on taxes or other expenses might have been possible.
However, the Tax Cuts and Jobs Act changed the law. The TCJA changed the amounts and types of taxes you can claim on your tax returns from 2018 forward.
Divorce and Taxes in Massachusetts
Laws surrounding divorce can vary from state to state. If you’re getting a divorce in Massachusetts, consult a tax professional for advice.
Divorce, real estate, and taxes can be complicated. Please don’t leave it to chance. I would love to assist you if you plan to sell your home in divorce in the Metrowest, Massachusetts area. Reach out for a confidential interview.
Additional Tax Tips For Divorcing Homeowners
- The complete IRS guide to tax questions while selling a home and getting divorced – see additional valuable guidance on selling a house during divorce from The Internal Revenue Service.
- Divorcing women need to understand real estate appraisals – learn about real estate appraisals and other considerations via Forbes.
- Should I file separate or joint tax returns when getting a divorce? Get helpful guidance from Nolo on whether it makes sense to file jointly or separately.
Use these additional articles referenced above to make intelligent tax decisions during divorce. Before treating marital assets, a certified accountant or other financial specialist should verify all tax and financial advice.
Taxes and divorce can be complicated when intertwined. This is not something you should take lightly. Those that do often regret it sometime down the road.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on filing taxes after divorce. He is an expert in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
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