Divorced: Family Home Was Sold in Settlement

When the family home is sold as part of the divorce, capital gains taxation depends on timing, ownership duration, and your ability to claim the $250,000 exclusion.

How the gain is split: Each spouse reports their share of the gain on their own tax return. Typically, the gain is split according to the same ratio as the proceeds (often 50/50, but not always). Your share of the gain is the difference between your allocated sale price and your share of the original cost basis plus improvements.

The exclusion still applies -- maybe: Each spouse can potentially exclude up to $250,000 of their share of the gain, provided they individually meet the ownership and use test (owned and lived in the home as a primary residence for at least two of the five years before the sale). If the home was sold quickly after separation, both spouses usually qualify.

Timing complications: If one spouse moved out more than three years before the sale, they may fail the use test and lose the exclusion on their share. However, if the divorce decree required the sale and the other spouse continued living there, the absent spouse may still qualify under a special rule that treats the home as their residence while the other spouse occupies it under the decree.

The pitfall: Failing to coordinate the reporting between ex-spouses can trigger IRS matching notices. Both returns should report the sale consistently, using the same sale price and allocation.