You have many things on your mind.
You wonder what your life will be after your Charleston divorce. What will happen with child custody? Child support? Alimony? Division of marital property and debts? And more . . .
You may not be thinking about taxes . . . but you should be. Your Charleston divorce could have serious tax consequences for you.
Many Charleston couples battle over who will get the house in the division of marital property in their divorces. Some fight for emotional reasons. Others want the marital home for financial reasons.
You should consider the potential tax consequences before you fight for the marital home in your Charleston divorce. You could be stuck paying a significant amount of Federal and South Carolina taxes if you receive the marital home as part of your divorce settlement.
You can exclude from your taxable income only $250,000 of gain if you sell your home after your divorce. This is one-half of the $500,000 of gain from the sale of your home that you and your spouse could have excluded from being taxed before your divorce.
What Are the Requirements for Avoiding Taxes When You Sell Your Home After Your Charleston Divorce?
To qualify for this tax benefit, you must satisfy three specific requirements:
(1) You must have owned the property for two years or longer before you sell it.
(2) You must have used the house as your principal residence for two of the five years before you sell it.
(3) If you have sold one residence at a profit within the last two years, you cannot exclude from taxation the gain that you make from selling a second residence during that same two-year period.
To satisfy the two-year residency requirement, you have to be able to show to the IRS that you used the house as your principal residence for 730 days (365 days x 2 years) out of the prior five years. According to IRS Publication 523, your two-year period of house use during the five-year period does not have to have been continuous. The IRS only requires you to have used the house as your principal residence for 730 days at some time during that five-year period.
If you have not lived in the house for the required two years at the time of your Charleston divorce, you may still be able to take advantage of the tax benefit. First, you can exclude the gain from selling your home if you continue to live in the house – after your divorce – until you have satisfied the requirement for 730 days of residence out of a continuous five-year period. Second, you might qualify for a reduced, prorated exclusion of your gain from selling the house because of your divorce.
Who Can Use the Tax Benefit If You Own Two Houses and Get a Divorce?
You should also consider another tax principle in your divorce settlement negotiations – Not all marital homes are taxed equally if they are sold after a Charleston divorce. Some couples are fortunate enough to have a principal residence in Charleston and a beach home on the Isle of Palms, Sullivan’s Island, or Kiawah Island. In that situation, a Charleston divorce judge might award the Charleston house to the wife and the beach house to the husband. This is particularly true if both houses have roughly the same net equity value (which can be determined by subtracting the amount owed on the mortgage from the market value of the house).
You can exclude from your taxable income only $250,000 of gain if you sell your home after your divorce.
For divorce settlement purposes, the Sullivan’s Island beach house could be worth much less than the Charleston house – even if the net equity value of both properties is the same. Unless the parties had been living separately for two years, the husband cannot immediately exclude from his taxable income his gain from selling the beach house. The husband cannot take advantage of the tax exclusion until he has used the beach house as his principal residence for 730 days during the five-year period prior to its sale.
Since the Federal and South Carolina income tax rates are high, the husband could be forced to pay many thousands of dollars in income taxes upon selling the beach house before he satisfies the two-year residency requirement. In contrast, the wife would pay no taxes on the first $250,000 of her gain from selling the Charleston house in which the couple had resided before their Charleston divorce.
Helping You with Your Charleston Divorce
Going through a divorce can cause serious emotional distress. In addition, you may also be distracted from financial issues by helping your child through the divorce process, doing your job at work, and attempting to keep “your head above water.”
It isn’t easy to get divorced without taking a “financial bath.” This is particularly true when it comes to the potential tax consequences of any divorce settlement. Unless you’re a tax attorney or a C.P.A., you’re probably not familiar with the potential tax pitfalls that can later cost you tens of thousands of dollars as part of your Charleston divorce.
With so much at stake, you need the help of an experienced Charleston divorce lawyer. Please call me now at 843-631-7117 or use the contact form to ask me questions. I can help you.
Working together, we will build a better future for you and your child in Awendaw, Charleston, Daniel Island, Goose Creek, Isle of Palms, James Island, Johns Island, Kiawah, Mount Pleasant, North Charleston, Sullivan’s Island, Summerville, or West Ashley.