Dear Tax Talk,
I am in the middle of a divorce. If we sell our second home, which was a vacation home, do I have to pay capital gains tax if I use the money to buy a permanent primary home for myself?
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If you meet the IRS requirements, you are able exclude capital gains of up to $250,000 ($500,000 if married filing jointly) only on the sale of your main home. That generous capital gain exclusion isn't applicable for a secondary home, even if you use the sales proceeds to buy a primary home for yourself.
However, in your situation, since you own more than one home, you should look closely at what is considered your "main" home. It not only depends on where you spend most of your time, but also other facts and circumstances, such as what address you have on your driver's license and voter's registration, where you work and so forth.
The IRS requirements for exclusion of the gain are as follows:
- You owned the home and used it as your main home during at least two of the five years leading up to the date of the sale.
- You did not acquire the home through a like-kind exchange (also known as a 1031 exchange) during the past five years.
- You did not claim any exclusion for the sale of a home that occurred during a two-year period ending on the date of the sale of the home you are selling.
If you determine that you are unable to exclude the gain on the sale of the second home, there are possibly some planning opportunities for you if you are flexible. For example, you can live in the vacation home over the next two years to establish it as your main home, and then you'll be eligible for the capital gains exclusion.
I do not have your specific information, so I suggest that you sit down with a qualified tax professional who knows the tax ramifications for divorced or separated individuals and also the requirements on excluding the gain on the sale of your main home. Also, please take a good look at IRS Publication 504, Divorced or Separated Individuals, as it contains some valuable information that may apply to you.
Finally, be sure to make a list of your questions and concerns prior to the appointment with the tax pro so it can be a productive meeting. Be prepared to bring a copy of your most recent income tax return along with a list of all assets and liabilities that are part of the divorce.
Thanks for the great question and wishing you all the best.
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