When both spouses use the marital home as their primary residence for two out of the last five years prior to the time of the sale of the residence, each spouse may take up to $250,000 as an exclusion of any potential gain when the property is sold.
For example, if the marital home is worth $1 million, and the basis for the property is $600,000, when the property is sold, there would normally be a $400,000 gain. If both spouses prior to the sale use the property as their primary residence for two out of the last five years from the time of sale of the residence, they can exclude the entire $400,000 in gain.
When looking at the tax issues in any divorce proceeding, it is important to determine the basis of the marital residence to see how much potential gain will be triggered upon sale. If there is more than $250,000 of potential gain, it is important to sell the property when it is still jointly titled so that each party can use their $250,000 of exclusion and protect up to $500,000 in potential gain which would be subject to tax. It is also important to make sure that both spouses comply with the rule that it must be their principal residence for two of out of the last five years. For example, if one of the spouses leaves the marital home and the parties want to take advantage of both $250,000 exclusions, it is important to time the sale of the property so that each party can claim the residence as their principal residence for two out of the last five years prior to its sale.