When it comes to divorce, understanding real estate and mortgage implications is crucial. Approximately 70% of all divorces in the U.S. involve real estate, impacting around 560,000 divorcing couples annually. Navigating these waters requires specialized knowledge, particularly concerning potential capital gains taxes. Here’s how a Certified Divorce Lending Professional (CDLP®) can assist you.

Understanding Capital Gains Exclusions for Divorcing Couples

When selling the marital home, potential capital gains taxes are a significant concern. To qualify for the Section 121 exclusion, both the ownership and use tests must be met. Currently, the capital gains exclusion allows for a $250,000 individual exclusion and a $500,000 marital exclusion.

Ownership and Use Rules

Ownership Rule: To meet the ownership rule, individual ownership must exist for the individual exclusion, or joint ownership for the marital exclusion. Ownership can be established through legal title or marriage. For couples filing jointly, only one spouse needs to meet the ownership requirement, potentially increasing the exclusion to $750,000 if one spouse remarries and meets the residency requirement.

Important Note: To maintain the marital exclusion, both spouses must stay on the title post-divorce. Breaking the chain of ownership may disqualify them from the marital exclusion.

Residence Use Test

Residence Use Test: Each spouse must have used the home as their primary residence for at least 24 months within the previous five years. This requirement doesn’t necessitate consecutive months but a total of 24 months (730 days). For married couples filing jointly, both spouses must individually meet this residence requirement.

Even if a spouse vacates the home, they can still meet the Residence Use Test if they retain ownership and the remaining spouse continues to use the home as their primary residence under a divorce or separation agreement.

Partial Exclusion of Gain

If divorcing couples don't meet the full eligibility test for ownership and use, they may still qualify for a partial exclusion. The IRS allows for a prorated exclusion in cases of divorce, recognizing it as an unforeseeable event.

Example: Jack and Diane purchased a home for $400,000 in July 2020. By January 2022, they decide to divorce and sell their home, now valued at $550,000, resulting in a $125,000 capital gain. Although they only lived in the home for 18 months, they can use a prorated exclusion of 18/24 or 75% of the available exclusion amount.

The Role of a Certified Divorce Lending Professional (CDLP®)

A CDLP® plays a vital role in helping divorcing homeowners navigate complex financial and tax planning issues related to real estate. They ensure:

  1. Comprehensive Analysis: CDLPs conduct thorough assessments of home equity, income sources, and debts.
  2. Strategic Planning: They help create strategic plans for managing mortgage payments and housing expenses post-divorce.
  3. Avoiding Pitfalls: CDLPs identify potential hurdles and help avoid conflicts with lending requirements.
  4. Professional Collaboration: They work seamlessly with divorce attorneys, financial planners, and real estate agents to ensure a cohesive strategy.

Why Choose a CDLP®?

  • Expert Guidance: CDLPs offer specialized knowledge and experience in divorce mortgage planning.
  • Informed Decision-Making: They empower you to make strategic decisions for long-term financial health.
  • Financial Stability: Proper planning with a CDLP® can prevent financial hardships.
  • Avoid Common Mistakes: They help you navigate potential pitfalls that could impact your credit and financial stability.
  • Comprehensive Support: CDLPs provide personalized planning tailored to your unique needs.

Conclusion

Working with a Certified Divorce Lending Professional (CDLP®) ensures you make informed real estate and mortgage decisions during a divorce, safeguarding your financial stability. Whether addressing capital gains taxes or strategizing homeownership post-divorce, a CDLP® provides the expertise and support you need.

Ready to get started? Connect with a Certified Divorce Lending Professional (CDLP®) today to develop a strategic plan tailored to your needs. Visit Divorce Lending Association for more information.

Disclaimer: This material is for informational purposes only and does not constitute legal or tax advice. Please consult an attorney or tax professional for specific guidance. Interest rates and fees are subject to market fluctuations. This is not a commitment to lend. Rates change daily—please call for current quotations.

Copyright 2021 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.