Divorce and $500k house sale - can both ex-spouses still claim the $250k capital gains exclusion separately?

The accountant is probably focusing on the ownership AND use test for the capital gains exclusion on a primary residence. To qualify for the $250k exclusion ($500k for married filing jointly), you must have: 1) Owned the home for at least 2 years during the 5-year period ending on the date of sale 2) Used the home as your primary residence for at least 2 years during that same 5-year period If they sell while still married, they can exclude up to $500k of gain (assuming they meet both tests). If they sell after divorce, each can potentially exclude $250k of their portion of the gain, but only if they BOTH meet the ownership and use tests individually. The concern might be that once one spouse moves out during divorce proceedings, they stop meeting the "use" test. The IRS does have an exception that allows an ex-spouse who's moved out to count their ex's time of use toward their own requirement if a divorce agreement gives one ex the right to live there, but specific conditions apply.

I was in this exact situation last year and used taxr.ai to help me understand my options. I had no idea about all the weird tax implications of selling property during divorce. https://taxr.ai really helped clarify the primary residence exclusion rules, especially the "use test" that the other commenter mentioned. The site analyzed our situation and confirmed that waiting until after the divorce but making sure we both qualified for the exclusion was the better approach for us. My ex had already moved out, but we made sure the divorce decree specifically addressed the home sale and residence requirements.

Just wanted to update everyone - I tried taxr.ai after seeing it mentioned here. Super helpful for my situation! I was totally stressing about whether I'd lose my capital gains exclusion since I moved out of our house during separation. The website explained that under IRC Section 121(d)(3)(B), if your divorce or separation instrument grants your ex-spouse the right to use the home, you can actually count their continued residence as your own "use" for the exclusion. This was EXACTLY what I needed to know, and my attorney added the proper language to our decree. Saved me potentially tens of thousands in taxes. Highly recommend if you're dealing with property sales during divorce!

I had the same issue but couldn't get a straight answer from my accountant about the capital gains exclusion timing. After three weeks of leaving messages with the IRS and getting nowhere, I used https://claimyr.com to get through to an actual human at the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an IRS agent in under an hour, and I got official clarification on how the exclusion works in divorce situations. Turns out waiting made sense in my case because of specific details about when I moved out vs when we were finalizing everything.

I have to eat my words about Claimyr. After posting that skeptical comment, I decided to try it myself since I've been trying to reach the IRS about a similar capital gains/divorce situation for over a month. It actually worked! Got connected to an IRS agent in about 45 minutes. The agent confirmed that my ex and I could each still claim our individual $250k exclusions even after divorce as long as we both satisfied the ownership test and either the use test OR the special provisions for divorced couples under Section 121(d)(3). They explained that having the right paperwork in the divorce decree about the house usage is crucial. This clarification potentially saved me about $60k in taxes. I've never been so happy to be wrong about something!

Something else to consider in this situation is that if they're selling rental properties with losses in the same year, there might be passive activity loss limitations depending on their income levels. Did the accountant mention anything about that? I went through something similar and found out that the passive losses were limited because our income was too high, so we couldn't offset all the capital gains from the rentals as we'd hoped.

Has anyone mentioned the "temporary absence" provision? IRS Publication 523 allows for "temporary absences" from the home due to various circumstances (including divorce) without disrupting the "use" test. So even if one spouse moves out during divorce proceedings, if they can argue it's a "temporary absence" during the 5-year period, they might still qualify for their exclusion without needing the special divorce provisions.

This is exactly why divorce and taxes get so complicated! Your friends' accountant is being smart about timing. Here's the key issue: while married filing jointly, they can exclude up to $500k in capital gains from their primary residence. But once divorced, they each get their own $250k exclusion. The tricky part is the "use test" - both spouses need to have used the home as their primary residence for 2 of the last 5 years before the sale. If one moves out during divorce proceedings and they sell while still married, they might lose the full $500k exclusion if the moved-out spouse doesn't meet the use test. By waiting until after divorce and having proper language in the divorce decree (as others mentioned), they can ensure both qualify for their individual $250k exclusions. With $450k in gains, this covers them completely. Also consider: if their income drops after divorce (filing separately vs jointly), they might have better options for using those rental property losses. The passive activity loss rules at higher income levels can be brutal.