Q. I got divorced a year ago after being separated for more than five years. My ex-wife has been living in the property for the last six years and I lived elsewhere. The gain after paying off the mortgage and closing costs is $77,000. As part of the divorce decree she gets half the money. Do I have to pay capital gains on the whole capital gain or half?
A. To answer your question it is important to understand three basic things about your situation.
The first thing to understand is what your actual capital gain is on the sale. Next is what part of this gain will be taxed by the IRS, and finally, you need to understand what your divorce settlement says and how that will impact your set of circumstances.
Your capital gain is not what you keep in your pocket after the sale of a property, said Amber Leach, a certified divorce financial analyst with AXA Advisors/R.I.C.H. Planning Group in Morristown.
In general, she said, your capital gain is the difference between what you paid for your house plus any improvements — not repairs — and what you sold the property for minus any selling costs.
Once you know the capital gain, you need to figure out what, if any, is taxed.
Like most things concerning the IRS, this can be complicated, Leach said, so you should consult your accountant or go to IRS Publication 504, Divorced or Separated Individuals.
As a boon to homeowners, the IRS does offer an exclusion for paying tax on capital gains if certain conditions are met, Leach said.
“For single filers you can exclude $250,000 in capital gains and if married filed jointly you can exclude $500,000,” she said. “However you do need to pass certain eligibility tests.”