Enter facts in the fields provided for ownership interest and Federal/state tax rates. Use the Present Value menu to look at state tax rates.
Enter:
Selling price (less any commissions),
Existing loans,
Tax basis of home, and
Any depreciation for business use (this is taxed at 25% and the program will change the tax basis for the capital gains tax).
This report is used to show the cash proceeds to the two individuals from the sale of the marital home. Since capital gains tax is now paid only on gains exceeding $250,000 per person, there will generally not be federal or state tax on the sale of a marital home as part of a divorce.
For valuing assets in a divorce, this report may be used to show the impact of the house sale reflecting:
Cash after loans are paid off, and
After any income tax (if applicable).
Calculate the result to view the report.
The 1997 tax law revisions eliminate capital gain tax on the sale of a principal residence if the gain on such sale is less than $500,000 for married taxpayers, or $250,000 for other taxpayers. The individual must have owned and occupied the residence as a principal residence for a total of two of the five years before the sale.
The exclusion applies to one sale every two years with certain prorations available for more frequent sales if due to:
A change in employment,
Health, or
Unforeseen circumstances.
In which case, the excluded amount of gain is the time the home did qualify as a percent of the required two years multiplied by $250,000 ($500,000 if married, joint).
If the gain is more than $500,000 for married taxpayers ($250,000 for others), a capital gain tax will be due at the time of the sale.
For married taxpayers filing jointly, the $500,000 exclusion is available if either spouse meets the ownership test, both satisfy the use test, and neither spouse is eligible due to a sale in the past two years.
The exclusion is determined on an individual basis. If married individuals file a joint return, but each has a separate residence, a $250,000 exclusion is available to each spouse on the sale of each's principal residence.
Tax will be paid on the gain associated with rental or business use of portion of a principal residence. The rate for depreciation recapture is 25% of certain business deductions for a home. The rollover rules for replacing a principal residence are repealed. See IRC, Sec. 1034 (repealed). And, the $125,000 age 55 exclusion has been completely rewritten. See IRC, Sec. 121. Individuals who had used the age 55 exclusion are eligible to take advantage of the new capital gain exclusion.
This corrects a major problem for divorcing individuals who had moved out of the principal residence and who still had an ownership interest in the home. Now, if they lived in the house for an aggregate of 2 of the 5 years before the sale, they may exclude gain of up to $250,000.
In the past, the home should have been their principal residence at the time of the sale to qualify for the old rollover rule. The law contains a specific provision relating to Property Used by Spouse of Former Spouse Pursuant to Divorce Decree. See IRC. Sec. 121(d)(3)(B). This section states: "an individual shall be treated as using property as such individual's principal residence during any period of ownership while such individual's spouse or former spouse is granted use of the property under a divorce or separation instrument."
This addresses the case of an individual who has retained an ownership in the house, but the former spouse occupies the house for a period of more than 3 years from the time the owner, non-occupying individual has vacated the home. It allows an individual to be able to exclude up to $250,000 of gain when the house is sold even though that person did not actually occupy the home for 2 of the last 5 years before the sale.
Amounts which have been depreciated (business use of home) will be taxed at a 25% federal rate (+ state rate) and this will be payable when home is sold, even if total gain is less than $250,000.
Any amount entered as depreciation for the recapture tax will be added to tax basis for calculating the regular capital gain tax calculation. In calculating state and federal taxes on the home sale, itemized deductions are assumed. The software calculates an overall marginal tax rate as:
Formula: State % + (Federal % - (Federal % * State %))
This is an approximation since the true marginal federal rate is not known from available data The software uses a 20% federal capital gains rate. Total federal plus state tax on house sale will be slightly less than figures on report if individual's federal marginal rate is greater than the 20% federal capital gain rate.