This situation has various moving parts, as you might guess from the title. Here’s the background:
My wife and I own our home as tenants in common (I’m not sure if that factors in, but I mention it just to be thorough). We are planning on selling our current home in June 2025, give or take. We’ve both lived here continuously since 2016.
When we sell the current home, our ideal scenario is to still be married. However, we are planning a divorce in 2025 - finalizing this either (1) a few months after selling, or (2) on Jan 1, 2026.
We want to finalize divorce after selling so that we qualify for the $500K capital gains exclusion. Additionally, we’d prefer to finalize the divorce until 2026 so that we can file married jointly (MFJ). So our ideal scenario is (1) sell the house, (2) she buys a different home (I’ll be renting), and (3) stay married until 2026.
However, there are some complications — here are more details:
My wife wants to buy her own home right away when we sell, but since she’s buying as an individual, her income without mine as her co-signer won’t be high enough to qualify for a loan, i.e. her debt-to-income (DTI) will be too high. This problem is solved once she has documentation about the alimony she’ll be getting from me; but of course that documentation isn’t “official” (in the eyes of a lender) until the court approves the divorce agreement.
This suggests we’d need to finalize the divorce in early 2025,so she has documented alimony to help her qualify for a loan. But that complicates our preferred filing status of MFJ.
On to my questions, with apologies in advance for this brain-dump of confusions:
- am I right that we must remain married until 2026 to be able to do MFJ for 2025? iow we’d need to file singly for 2025 if are not married on Dec 31, 2025…is that correct?
- does MFJ or file-singly actually matter in terms of the total cap gains exclusion? i.e. if we’re already divorced, I assume we need to file singly and we’d each get $250K. So this seems to have the same bottom line for us, since we’ve agreed to split home sale proceeds and subsequent taxes 50/50 anyway. Am I missing anything?
- is there other tax liability or downsides we should be aware of, wrt filing singly vs MFJ?
Finally, I realize this is not really a tax-related question: can anyone think of a workaround to get her DTI low enough to qualify w/o the alimony? e.g. can cash-on-hand + great credit score make up for this?
So bottom line, the less-ideal scenario is this: (1) we finalize divorce and establish alimony in early 2025 so that she can qualify for a loan for her own home; (2) we sell our current home as two single people living together with deed as tenants in common; (3) each of us files singly for 2025, and we each get $250 capital gains exclusion; and (4) we split home improvement costs done to the home since 2016, to increase the basis for the home we’re selling and minimize cap gains tax liability, even though we are each filing singly.
The #4 bit seems dicey. Will that work? If only one of us can use the home improvement $ to increase basis, the other person will likely end up in a higher bracket than we’d like. Or am I overthinking this?
Many thanks in advance.
