Hi, this is Casey Lown with Strategic Mortgage Solutions
here to share another divorce mortgage planning moment. So oftentimes when I am sitting down and consulting with people that are considering getting a divorce, or with their divorce attorney, or family law advisor, I’m often helping them roll through different scenarios about; “How can we keep the house?” “Can I afford to keep the house?” “If I sell the house and we split the proceeds, can I qualify for another mortgage?” “What are the tax consequences?”
something else people need to consider in this decision-making process is the tax consequences of these choices. For instance, as an individual, IRS gives us a phenomenal sort of tax shelter break when it relates to selling a home that we’ve lived in for two of the last five years, they allow an individual to not have to pay capital gains tax on the first $250,000 of profit that they make on a house. As a couple, that can actually double to $500,000.
So imagine this,
imagine that couple that is considering getting a divorce has a house that they own and that they originally paid $200,000 for 25 years ago. Now that house is worth $600,000. One of them decides that they would like to keep the house and buy the other partner out. After the completion of that divorce, If they haven’t sold that house as part of the negotiation of that divorce, that’s what we would call the divorce settlement agreement, then, they now own a house with the original cost basis of $200,000. And if and when they go to sell that house, they are only going to be able to now shelter $250,000 of the potential profit from that property.
$150,000, $200,000, and $300,000 of unsheltered profit will be subject to capital gains tax which can be, depending on the tax bracket, a pretty substantial amount of money. So in some cases, when people have a substantial amount of gain on the sale of that property, it’s better just to go ahead from a tax perspective to just sell the property as part of the divorce agreement, split the proceeds from that sale, and then buy something else and restart that sort of shelter for individual capital gains on their next house and have that $250,000 for shelter start over again and never have to pay taxes potentially on up to $500,000 of profit from the house that they shared together.
that’s just a divorce mortgage planning concept that oftentimes comes up in our consultations. If you’re somebody that is considering getting a divorce and owns a home and wants to know their options about keeping it, what are their options to protect their ability to be able to purchase and finance a home later on after a divorce, then contact me for more information and hit the follow button in this video so that way you can be able to watch other videos about divorce mortgage planning concepts that I share and will upload over time. Have a great day. Thanks.