United States
Capital gains tax after divorce: who owes what on the house?
On a home bought for $300,000 and sold for $800,000 with $80,000 income, selling before divorce (MFJ) yields $0 tax under the $500,000 Section 121 exclusion. Selling jointly after divorce costs $0 ($250,000 exclusion each). But if one spouse keeps the home and sells later alone, they owe $42,440 because single filers get only $250,000 exclusion on the full carryover basis.
| Original purchase basis | $300,000 |
| Sale proceeds | $800,000 |
| Total gain | $500,000 |
| Tax: sell before divorce (MFJ) | $0 |
| Tax: sell after divorce (both single) | $0 |
| Tax: buyout spouse sells later | $42,440 |
| Section 1041 transfer | $0 tax (carryover basis) |
How does timing affect the tax on a divorce home sale?
Married couples filing jointly can exclude up to $500,000 of gain under Section 121, while single filers exclude $250,000.
| Scenario | Filing status | Exclusion | Taxable gain | Federal tax |
|---|---|---|---|---|
| Sell before divorce | MFJ | $500,000 | $0 | $0 |
| Sell after divorce (50/50) | Single each | $250,000 each | $0 | $0 |
| One spouse keeps & sells | Single | $250,000 | $250,000 | $42,440 |
Federal CGT on a $500,000 home gain at $80,000 income.
What is the Section 1041 carryover basis trap?
Under Section 1041, transfers between spouses incident to divorce are tax-free. But the receiving spouse inherits the original $300,000 cost basis, not fair market value.
If you buy out your ex and sell later as single, you get only $250,000 exclusion against the full $500,000 gain, owing $42,440.
How does the two-of-five year rule work after divorce?
Each seller must have owned and used the home as principal residence for 2 of the 5 years before sale. If one spouse moves out under a divorce decree, IRC Section 121(d)(3)(B) treats the non-resident spouse as using the home during the ex-spouse's occupancy, preserving both exclusions.
What do people get wrong about divorce home sales?
- Assuming the transfer itself triggers tax. Section 1041 makes incident-to-divorce transfers tax-free.
- Not accounting for carryover basis in buyouts. The buying spouse gets the original cost, not market value.
- Losing the residency test. Moving out too early without a decree protecting occupancy rights.
- Forgetting NIIT. High-income sellers may owe 3.8% Net Investment Income Tax on top of LTCG.
- Filing separately while still married. MFS filers get only $250,000 exclusion each, same as single.
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Common questions
Is transferring a house to an ex-spouse during divorce taxable?
No. Under IRC Section 1041, transfers incident to divorce are tax-free, but the receiving spouse inherits the original cost basis.
How much home sale profit is tax-free before divorce?
Married filing jointly can exclude up to $500,000 under Section 121 if both spouses meet the two-year ownership and use tests.
Can both divorced spouses claim the $250,000 exclusion?
Yes, if both remain on title and meet the two-year residency requirement, each can exclude up to $250,000.
What if one spouse moved out more than three years ago?
IRC Section 121(d)(3)(B) lets the departing spouse count the other spouse occupancy if granted by a formal decree.
Why does a buyout spouse owe more tax later?
Single filers get only $250,000 exclusion but hold 100% of the appreciation from the original joint basis.
This is an estimate for general information only, not tax, legal or financial advice. Tax rules are complex and depend on your circumstances, and figures may not reflect the latest changes. Confirm your position with Internal Revenue Service (IRS) or a qualified tax adviser before acting. The terms of use set out the limits of this estimate and of our liability.
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