A reader recently asked NJ.com about the tax liabilities of selling a marital home after divorce. Specifically, the reader wanted to know how buying out an ex-spouse’s net value will impact capital gains taxes upon sale of the home.
Ideally, this is a subject that would have been discussed with you, with the benefits and consequences thoroughly vetted by your New Jersey divorce lawyer.
A home is typically among a divorcing couple’s most valuable assets and tax implications can have a major impact on net equity. Costs of selling a home, including realtor costs, closing costs and the costs of necessary repairs or improvements, can also drain home value that looked much better on paper.
New Jersey law is the same as federal law when it comes to taxing capital gain on the sale of a primary residence. You can deduct up to $250,000 of capital gain on the sale of a primary residence as a single person. Married filers can deduct up to $500,000 in gain. Under IRS rules, there is no recognized gain or loss when a property transfers between spouses during divorce. Thus, the tax basis of the property will remain the same as it was before the divorce.
Marital Home and Property Division in New Jersey Divorce
Aside from child custody, the fate of a marital home is often one of the most contentious issues among divorcing spouses. However, it’s the job of your New Jersey divorce lawyer to make sure your primary asset doesn’t become an albatross.
During the economic downturn, statistics suggest that plummeting home values reduced the divorce rate. With economic recovery, many couples have largely regained the economic independence that comes with significant home equity. But winning a marital home at all costs is a bad idea. Factors to consider when determining whether retaining a home is right for you include:
- Negotiating the buyout: Frequently, a custodial parent will “buyout” the equity of a non-custodial parent so that the children can remain in the home. Keep in mind buying out the equity of a spouse likely means he or she walks with more cash, while you retain an asset that could be hard to sell and may significantly decline in value.
- Affordability: Determining a home’s value and condition will be critical in deciding whether you can afford the home as a single parent.
- Valuation: A fair valuation is equally critical. The last thing you should do is to negotiate a value based on what you hope it’s worth. Major repairs and other factors can significantly impact a home’s value.
- Taxes: In addition to capital gains, a portion of property taxes and assessments may be owed by a former spouse. Liquidating other assets, such as brokerage accounts, to buyout a spouse may also have tax implications.
- Refinancing Issues: Refinancing can also cause unforeseen consequences. A spouse set on refinancing to cash out equity after a divorce is finalized may find she cannot afford the new mortgage payment in today’s higher interest rate environment. Monthly payments will increase by about $300 for every 1 percent in additional interest on a $300,000 home.
The goal of your New Jersey divorce lawyer should be to protect your financial interests, not to fulfill your wishes at all costs. If after a full valuation and discussion of all the implications you decide to keep the marital home, you will have a better understanding of the price you will pay. In some cases, a client will decide to stay. In other cases, selling the home and allowing each spouse to make a fresh start will be the best course of action.
Call Rozin|Golinder Law, LLC today for a free and confidential consultation so you can determine what the best course of action is for your case.
Additional Resources
New Jersey Marital Property Laws
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