4 Smart Ways to Split the House During a Divorce

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ShutterstockTax implications of a home sale as well as lifestyle plans should be part of the decision-making process in a divorce.

Your home is likely the biggest asset you and your spouse own, so it's critical to split it fairly during a divorce. No matter what you choose to do, you'll likely face tax and financial consequences.

Here are four options that work for most people:

1. You buy out your spouse's half of the house.

A buyout works only if you've got the cash on hand to fund it, or you can qualify for a new mortgage from today's tightfisted mortgage lenders.

What you pay your spouse doesn't have to be exactly half the value of your home. Maybe you'll take a bigger portion of the savings and your spouse will get less than half the home price.

Don't rely on an online estimate to value your home. Contact a real estate professional to get an accurate, up-to-date price opinion or pay an appraiser to value your home.

Good news: You likely won't owe any capital gains taxes when you sell your half of the house as part of a divorce, even if it has appreciated since you bought it.

Bad news: Spouses sometimes lie. If you're the one who's selling, get written proof that your former partner paid off any existing mortgage or home-equity lines so you're sure you're no longer responsible for the debt.

2. Sell it and split the profit now.

You can rid yourself of your spouse and your house if you sell and split the proceeds. You won't owe federal tax on your post-divorce home sale profit if you meet these rules:

• Your profit it doesn't exceed $250,000 (filing single).
• The home was your principal residence for two of the past five years.
• You haven't used the home-sale profit exclusion in the past two years.

Good news: There are some loopholes in the "you have to live there for two years" rule. Read about them in IRS Publication 523 Selling Your Home.

Bad news: State real estate and divorce laws can also influence your capital gains taxes, particularly in community property states.

3. Keep the house until the children move out, then sell and split the profits.

When children are involved, often one parent will remain in the home with the children while the other one moves out of the house during the divorce.

When the children are launched, the couple sells the home and splits the profit. If you're the one who moved out and you haven't lived in the house in two of the past five years, you could owe taxes on the profit from the home sale.

Good news: Fortunately, there's a work-around. If your divorce or separation agreement outlines your future plans to sell the house, the IRS considers that as meeting the two-out-of-five year residence rule.

Bad news: Your spouse could lower the value of the home by failing to maintain it or could lose it to foreclosure or by not paying property taxes.

4. You and your spouse keep the house and take turns living there.

It's pretty rare that a family opts to maintain three households, but it can happen. The children stay in the original home and the parents alternate living with the children and living in their own homes after the divorce. If you split the expenses, you'd each deduct the expenses you paid, such as mortgage interest and property taxes.

Keep in mind that you can only deduct mortgage interest for a home you own and from a mortgage you're obligated to pay.

Good news: Putting the kids first qualifies you as an amazing parent.

Bad news: You'll suffer the way children do when they shuttle between divorced parents' households -- that report due at work today will end up being at the other house and the shirt that matches your pants will be in your other closet.

Tax laws are complicated and the devil is in the details. This article contains general information, so it may, or may not, apply to your situation. A tax professional or tax software can tell you how the tax rules apply in your circumstances.
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