How is the profit from the sale of our home taxed during a divorce?
My income is approximately 35k. My status is separated, living separately . We sold our primary residence. After the 250k/500k that is not taxed, how is the remainder of the capital gain taxed? .
My husband’s income is 150k. My income is 38k. If we are separated how will I be taxed? Would it be any different if we were still married, separated or divorced for 2019? The captain gain is probably about 1.2 million. We lived in the house for 20 years.
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There are a few questions imbedded into your email, so I'll be taking them one at a time. Before starting, however, you will likely benefit from talking with a financial professional, at least CPA for doing your taxes this year. To answer your main question, assuming the property was never depreciated as an investment property, your share of the capital gains will be taxed at long-term capital gains rates. This should be a tax of 15% of the capital gain above the exclusion amount.
Example:
Using the numbers you gave, your share of the capital gain would be about $600,000. You would subtract the $250,000 exclusion and end up with $350,000 in gains, which would likely result in a $52,500 tax bill. Obviously, these numbers are just an example and do not represent your actual tax bill.
Minimizing Your Capital Gains Tax
Determining the true capital gain, however, is a little more complicated than subtracting the purchase price from the sale price. Your capital gain is the sale price, less any costs of sale (like the realtor commission), less your basis in the property.
Basis includes the original purchase price, but also includes any costs for capital improvement you made to the property. This would include the cost of adding on another bedroom or the cost of replacing the roof. If you kept records of these costs, they can lower your tax burden. Costs of maintenance and repairs, such as repainting the walls or repairing the roof, do not add to your basis, however.
Filing (Marital) Status Effects The Tax
Your question on whether being divorced, separated, or still married would impact the taxes, the answer is yes. There are numerous filing statuses, and each has its own tax brackets and rules. As a result, the difference in your marital status at the end of 2019 will impact your tax liability due to the changing brackets.
Since you are married but separated, you would likely file Married Filing Separately (MFS). You could file Married Filing Jointly (MFJ), but there are legal implications which should be considered before doing this. MFS has the worst set of rules and often results in the highest tax burden, due in large part to taxpayer abuse of the filings status in the past.
If you finalize the divorce before January 1 of 2020, you would be allowed to file under the Single status, which would likely be a better tax situation. Again, there are legal and other financial implications to rushing a divorce, so this would not be a reason to sign paperwork in the last few days of December. And just to make it more confusing, if you have a minor child in the house, you could file under the Head of Household status.
Get Professional Help
This is not something you want to do on your own. If you don't have your own divorce attorney, you should get one to represent your interests in the divorce. There is a significant difference in your incomes and significant assets at stake, including retirement accounts. You need to make sure this divorce does not leave you destitute. You also should have a CPA to help you with the tax issues related to the sale of the home and other aspects of the divorce.
Finally, I also recommend finding a fiduciary & fee-only financial advisor to assist you with analyzing the division of assets in a divorce. While an attorney is important, extremely few attorneys have expertise in analyzing financial assets and an attorney may create a division of assets which seems equitable, but is actually unfair based on implications such as maintenance costs, tax liability, liquidity, risk, and return potential. Additionally, you will be receiving a settlement which is intended to establish you for both the near term and the long term. As a result, the assets should be positioned to help with all of your varying lifetime goals including short term needs, retirement, and other long-term goals.
Realize that not all financial advisors are the same and the ones who reach out to you may not have your best interest at heart and may only be looking for a quick commission off a sale of a mutual fund, annuity, or life insurance product. Currently, only Registered Investment Advisors are fiduciaries who are legally required to put your interest above their own. Insurance Agents and Stock Brokers are sales representatives who have a legal duty to their employer; and their employer has no legal duty to do what is in your best interest. Purposeful Finance has an excellent guide to choosing a financial advisor, if I do say so myself.