(This valuable series on Dividing Property In A Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.)
III. Section 1041 Specifics as to Type of Property
1. The Marital Residence
Perhaps the most common property division issue the practitioner will face when a couple divorces will be the division of the marital home. Often, which spouse, if any, will end up with the home will be the central issue in the property settlement.
Furthermore, non-monetary issues such as emotional attachments, or the preferred school district for couples who have children, frequently complicate matters.
Given the above, it is imperative that the practitioner be thoroughly familiar with the tax ramifications of dividing the residence.
- A qualifying single taxpayer can exclude up to $250,000 of gain on sale of principle Qualifying married couples filing jointly can exclude up to $500,000.
- Taxpayer must have maintained the home as his/her principal residence for two out of the last five years.
- Taxpayer must have owned the residence for two out of last five years
- Only one sale every two years qualifies for the exclusion. Taxpayer must not have used the exclusion during the previous two-year period before the current sale.
Tax Trap Alert: Practitioners should familiarize themselves with the major exceptions and special cases IRC Section 121 and the related regulations and rulings address, including but not limited to the following: