How to handle capital gains tax after selling house during divorce?
I finalized my divorce in November 2022 and we sold our house as part of the settlement. Based on this timing, I know I need to file as single for 2023. Where I'm completely lost is how to handle any potential capital gains from the house sale. The proceeds were divided unevenly between me and my ex according to our mediation agreement. The closing documents included what looks like a substitute 1099-S form, but it only shows the selling price of the house ($735k), not any other details. Here's the breakdown: $735k sale price, $367k remaining mortgage paid off, $120k to my ex, $190k to me, and the rest went to realtors and various closing costs. Do I need to report capital gains on this? If so, how do I calculate it when the proceeds were split? I lived in the house for almost 8 years if that matters. I've never dealt with selling real estate during a divorce and could really use some clear guidance on how this works for my taxes.
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Lucas Parker
You're asking a great question about a common but complicated situation. When you sell your primary residence during a divorce, you may qualify for an exclusion of up to $250,000 of gain if you're filing single (or $500,000 if you could file jointly, which doesn't apply here since you're filing single for 2023). Since you lived in the home for 8 years, you satisfy the "ownership and use" test (which requires you to have owned and used the home as your primary residence for at least 2 out of the 5 years before the sale). This is good news! To calculate your gain, you'll need: 1) Original purchase price of the home plus 2) Cost of any significant improvements made during ownership. This gives you your "basis." Then subtract this basis from your portion of the proceeds to determine your gain. Only your share of the gain matters for your taxes, not the entire sale.
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Katherine Hunter
•Thank you for explaining! We originally purchased the house for $485k and did about $50k in renovations over the years (new roof, kitchen remodel). So my basis would be $535k total? But how do I figure out my portion since we split the proceeds unevenly? Would I just report my $190k as my proceeds?
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Lucas Parker
•You need to calculate the total gain first, then determine your share of that gain. So if the original purchase plus improvements totaled $535k, and the sale price was $735k, the total gain would be $200k. Since you received $190k out of the approximately $310k total proceeds after paying off the mortgage ($190k + $120k = $310k), you received about 61% of the proceeds. So your share of the gain would be about 61% of $200k, which is $122k. Since this is less than the $250k exclusion, you likely won't owe capital gains tax.
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Donna Cline
After reading this thread I realized I had a similar situation last year and found this amazing tool called taxr.ai (https://taxr.ai) that really helped me figure out how to handle my house sale during my divorce. It analyzed all my documents including the 1099-S and separation agreement and showed me exactly how to report everything correctly. It even caught a mistake my ex made in calculating the basis that would have cost me thousands!
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Harper Collins
•Does taxr.ai actually look at the divorce agreement too? My situation is similar but our split was REALLY complicated with some weird credits for improvements only one of us paid for. Can it handle that level of complexity?
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Kelsey Hawkins
•I'm interested but skeptical. How exactly does it figure out improvements you made years ago if you don't have receipts anymore? My ex and I did tons of work on our house but I doubt either of us kept great records.
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Donna Cline
•It absolutely handles divorce agreements - that was the most helpful part for me. You upload the agreement and it identifies the specific language about property division and translates it into tax terms. It even flagged sections I should discuss with my accountant. For improvements without receipts, it asks you questions about the types of renovations, when they were done, and helps you make reasonable estimates based on typical costs in your area during those years. It's not perfect but way better than guessing. It also helps you understand which improvements actually count toward your basis and which ones don't.
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Harper Collins
Just wanted to update after using taxr.ai that the other commenter recommended - it was actually incredibly helpful for my complicated house sale situation. I uploaded my divorce decree, closing documents, and some estimates for our home improvements, and it walked me through everything step by step. It helped me determine my correct basis in the property (which was higher than I thought) and showed exactly how to allocate the gain between me and my ex based on our uneven split. The tool even created a PDF summary I could give to my tax preparer. Definitely worth checking out if you're dealing with this complicated situation.
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Dylan Fisher
If you're struggling to get answers from the IRS about your divorce and home sale situation (like I was), I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes when I had been trying for DAYS. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with walked me through exactly how to report my portion of the capital gains after my divorce and confirmed I was eligible for the exclusion. She even explained the proper forms and where to note the special circumstances. Saved me from making a costly mistake!
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Edwards Hugo
•How does this even work? The IRS phone lines are completely jammed and I've tried calling at all hours. Are you saying this service somehow gets you to the front of the queue?
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Kelsey Hawkins
•This sounds like a scam. There's no way to "cut the line" with the IRS. Either you wait on hold for 3 hours like everyone else or you give up and hire a tax professional.
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Dylan Fisher
•It uses a system that continually calls the IRS for you using multiple lines and then connects you when one gets through. So you're not cutting the line - the service is essentially waiting on hold for you across multiple phone lines simultaneously and transfers you in when one connects. The reason I needed to speak with the IRS directly was because my situation had some complications that even my tax preparer wasn't 100% sure about, and I wanted official guidance. They were actually super helpful once I got through, and the agent documented everything in my file so there would be a record of the advice they gave me.
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Kelsey Hawkins
I need to eat my words about Claimyr because I actually tried it after posting my skeptical comment. I was desperate after waiting on hold with the IRS for 2+ hours three separate times and getting disconnected each time. The service actually worked exactly as described. I got connected to an IRS representative in about 20 minutes, and she was incredibly helpful with my house sale questions. She confirmed that my understanding of the capital gains exclusion was correct and explained exactly which forms I needed for my situation (which was great because my divorce included some unusual contingent payments tied to the house value). Honestly surprised and relieved to finally get definitive answers.
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Gianna Scott
One thing nobody has mentioned yet is that you should check your state taxes too! The federal capital gains exclusion is great, but some states have different rules. I sold my house last year after my divorce and qualified for the federal exclusion, but my state still wanted a piece of the action. Check your state tax department website or talk to a local tax pro.
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Katherine Hunter
•I didn't even think about state taxes! Do you know if most states follow the federal rules for the $250k exclusion or do they have their own systems?
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Gianna Scott
•Most states do follow the federal capital gains exclusion rules, but there are definitely exceptions. For example, Massachusetts has its own rules that sometimes differ from federal treatment. It's also worth checking if your state has any special forms for reporting real estate transactions. My state required an additional form that wasn't part of the federal return. Your state's tax department website should have information specific to your location.
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Alfredo Lugo
Has anyone dealt with splitting home office deductions in a divorce situation? We both worked from home in different rooms before selling, and I'm wondering if that affects the capital gains exclusion at all.
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Lucas Parker
•Yes, if you claimed a home office deduction, it can affect your capital gains exclusion. When you take a home office deduction, that portion of your home is considered business use, not personal use. If you claimed a home office deduction for part of your home, you may have to pay taxes on the gain allocated to that portion of your home, even if the gain on the residential portion is excluded. It's proportional - so if 10% of your home was used as an office, 10% of the gain might be taxable regardless of the exclusion.
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Alfredo Lugo
•Thanks for explaining that. I only used about 8% of the house as my office, so it sounds like a small portion might be taxable. I'll make sure to track that separately when I file.
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