How do we do taxes after a divorce and sold our primary home

[336452]

I am assuming we file separate single taxes for the year. How do we show the funds from the sale of our primary home (live in there 5 years not a rental) in May then divorced finalized in June? It was $2M and we paid $980K so we each netted $950K each.  Do we split the original cost ($980K) of the home and it improvement to offset our capital gains amount?

Then we each purchased a home for $400K how do we show this in TurboTax  and does it help lessen/postpone the rest if our capital gains?  

[Opus 17]

You file your taxes for the whole year using your marital status on the last day of the year.  So you will file as single (unless one or both of you has a qualifying child dependent that allows you to file as head of household.)

Unless your divorce agreement specifies otherwise you would be considered to each own half the house and be responsible for half the capital gains taxes, if any.  You will each also use half the adjusted cost basis (original purchase price plus certain closing costs plus improvements).  In turbotax, each former spouse would report they sold a home they owned and lived in, to qualify for the capital gains exclusion of $250,000 per person.  So you would report a cost basis of $490K and a selling price of $1M for your half-share, and your spouse would report the same.  You have a capital gain of about $500,000, of which you can exclude $250,000 and pay capital gains tax on the other $250,000.  

Allowable adjustments to the cost basis are listed in publication 523 beginning on page 8.

https://www.irs.gov/pub/irs-pdf/p523.pdf

If the divorce order specified something different (like a 60/40 split), you would report the selling price and the adjusted basis using that ratio instead. 

[xmasbaby0]

Your purchase of new homes is irrelevant.  The last time purchasing a new home to avoid capital gains mattered was in 1997.

If you were divorced before the end of 2022 then your 2022 filing status will be Single--or maybe Head of Household if you are the custodial parent of the children.

SALE OF HOUSE

If your gain was more than  $250,000 filing Single, or more than $500,000 filing Married Filing Jointly the sale must be reported on your tax return.  Whether you re-invested the gain in to another house is irrelevant.  If you  have a Form 1099-S go to Federal>Wages and Income>Less Common Income>Sale of Home (gain or loss)

If you owned and lived in the home as your primary residence for at least 2 of the last 5 years on the date of the sale, you do not have to report the home sale if the gain is less than $250K filing Single, or less than $500K filing Married Filing Jointly (and you both owned and lived in the home for at least 2 years).

• If you are using online TT, you need Premier or Self-Employed software to report the 1099-S

You may want to seek local paid tax help for your rather complicated situation, instead of preparing a do-it-yourself tax return for 2022.

And.....if you have been using online TurboTax for past year joint returns, you will need to use your own new account if you decide to use TT anyway.  It is too hard and messy to get the "spouse stuff" out of the account and off the transferred return, so you have to start fresh.

[336452]

Thxs for clarifying however, what about me buying a house as well does that not offset the other $250k capital gain now as it reinvested in a home. 

Also do you not have 2 years to report the capital gains on the 2ed $250k? 

[xmasbaby0]

Again----that tax law that helped people avoid capital gains by purchasing another home ended in 1997.  The only significance of buying another home is that if you itemize deductions you can enter the mortgage interest, property taxes and loan origination fees you paid  in 2022 for the new house.  The purchase of the new house does not in any way offset your capital gains.   And no, you do not have two years to enter the information about the sale of your former home.  It goes on your 2022 tax return.

Seriously---seek professional tax help from a pro who will explain all of this to you in detail.

[336452]

Thank you both for your responses that helps I appreciate it.

[Opus 17]

@336452 

no, the law about postponing the game by buying a new home was eliminated in 1997. Now, each home sale is treated as an entirely separate transaction, and it doesn’t matter how do you spend the money afterwards.

Each person can exclude up to $250,000 of capital gains if they owned the home at least two years and lived in the home as their main home for at least two years of the past five years.  in your case, you have a total capital gain of about $1 million, or $500,000 per spouse. You appear to qualify to exclude $250,000 of the gain from taxation, so you will pay tax on the other half of the gain.  You may be able to reduce the capital gain by documenting as many adjustments as you can – both closing costs and improvements.