Who pays capital gains taxes during a divorce?
Written by Michael Juilfs

Who pays capital gains taxes during a divorce?

Sometimes a divorce leads to the sale of the family home. When that happens, there is the chance of incurring capital gains taxes during a divorce. The question becomes, who is responsible for paying them? The situation isn’t limited to the family home, but certain other properties and investments the couple owns as well.

For example, Adrienne and Jeff have a marital home and two rental properties. They also have one child. Jeff and Adrienne decide that Adrienne will keep the marital home, which is the only property that would have been exempt from capital gains tax. The other two properties will be sold since neither wants to manage the rentals alone. Jeff has decided rather than living in one of the rentals, he’ll find a home that suits his needs.

There are a lot of nuances for Adrienne and Jeff. Adrienne will get some money for the sales, but Jeff will use some of his portion to purchase a home for himself. Will there be capital gains for Adrienne? How about Jeff?

Capital Gains Taxes

Unless you’re a tax professional, chances are capital gains taxes during a divorce are confusing. There are many rules surrounding capital gains. Here are a few:

  • Capital gains taxes may occur when you sell an asset for a profit.
  • The percentage of capital gains taxes you owe depends on your tax bracket.
  • During a divorce, there is an exemption up to a certain amount on your primary residence, but you need to have lived there for a specific amount of time. Contact a professional for more information.
  • Financial investments (stocks, bonds, mutual funds, ETF’s) may have “unrealized” capital gains – which will be taxed upon sale. They should be taken into account when dividing these assets.

Navigating Capital Gains Taxes During a Divorce

Divorce can create a lot of confusion about your financial picture. You are dividing or signing over your rights to assets and navigating the complex process of who gets what. Things can get overwhelming quickly. If you have to sell the family home or other properties, you may be concerned about paying capital gains taxes. There are several questions that are helpful to ask a financial professional.

  • Which party is responsible for the capital gains taxes?
  • How do we clearly spell out who pays what?
  • How much will the capital gains taxes be?
  • Is there a more tax efficient way to handle the sale of our house(s)?
  • We’ve lived in the primary residence a long time, how much of the profit can each of us exclude from capital gains taxes?
  • Should we continue to co-own the home?

Each situation is unique. Consulting a financial professional can allow you to understand the benefits and consequences of your decisions. A professional will be able to review your situation and offer options, as well as the advantages and disadvantages of each. Navigating this situation with a professional can prevent miscommunication and allow each party to make informed decisions.

Neutral Financial Professionals

Neutral financial professionals can help answer financial questions during your divorce. They are also able to refer you to professionals if you need additional support. Contact a Best Legal Choices professional to discuss capital gains during a divorce.