I was divorced and sold our primary residence in 2015. The net gain is less than $500K/$250K each, but TT says I have taxable capital gains of $117K.

[Christopher-in-MD]

How do I take half of the net gain and stay under the $250,000 exemption?

[Carl]

I assume you two still filed MFJ. If the property was EVER rental property during your period of ownership, then all prior depreciation is recaptured and taxed, NO MATTER WHAT. If you lived in the home less than 730 of the last 1826 days you owned it, counting back from the date of sale shown on the HUD-1, then if other conditions are met, you only qualify for a partial exclusion.

[GinnyF]

Did you receive the house as part of the divorce settlement? Or was the house sold as "joint" property and the proceeds split between you and your spouse?

[GinnyF]

Did your spouse quit claim the house to you as part of the settlement?

[GinnyF · Accepted solution]

If you received your whole house as a part of your divorce settlement, this is called a "transfer incident to divorce" and is not a tax event which changes your basis in the house. As you received both you and your spouse's share of the home, you are entitled to both basis amounts. This is based on the cost to purchase the home plus any improvements to the home prior to the divorce paid by both of you. You can also add to cost basis any amounts that you paid on your own to improve your home after the divorce.

You also need to consider whether you and/or your spouse have used any part of the property for rental or business use and taken depreciation on the home. The depreciation taken is subtracted from your cost basis. This depreciation amount may be subject to additional tax calculations and special rules.

Upon the sale of the home as the person who owns 100 % of the house, you would only receive a $250,000 exclusion for the sale of your primary residence. 

If however, the sale of the home is a joint sale of a primary residence, then each of you should split the sale and record 1/2 of the sale on each return. Then each of you would have your own $250,000 exclusion to declare. 

CAUTION: If you look at the Form 1099S, you will see what was reported to the IRS regarding this sale. The social security number and name on the Form 1099S is only yours, the IRS will expect to see the total amount of the sale on your return. You may have to send them additional documents to show the joint ownership at the sale date.

I am giving you a link to the IRS Publication 551, Basis of assets.  

www.irs.gov/uac/About-Publication-551

This other link will get you to the IRS Publication 504, Divorced or Separated Individuals.

www.irs.gov/publications/p504

I hope this helps you calculate your return correctly. Thanks for using Turbo Tax.