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Divorcing Texans can still take advantage of tax exclusion

While the Internal Revenue Service has come under the watchful eye of the media lately, it's easy to overlook some of the fundamental functions of the agency. With real estate in Texas and other states appearing to bounce back a bit from the great recession, it's important for couples to familiarize themselves with divorce-related tax issues. Such actions can impact property division and other aspects of a divorce.

Fortunately, if divorcing spouses plan ahead, they can still take advantage of the federal income tax exclusion for the gains on principal home sales. A married, jointly-filing couple can exclude, or pay zero federal income taxes on, gains of up to $500,000 on the sale of a principal residence. However, divorcing couples can still get a hefty tax break if they meet certain requirements.

In order for a home sale to meet these conditions, the house must be sold before the divorce actually occurs. If this is the case, the couple can jointly file for the year the sale occurs and claim the exclusion as normal. Still-married couples can also file separate returns, but both using the married and filing separate status. With separate returns, though, couples do have to meet a few other assorted conditions.

Couples can still claim the tax exclusion on a home sale if the home is sold in the same year as the divorce, or if someone buys the house shortly after the divorce. Ex-spouses are unable to file jointly, but the community property aspect of many houses comes into play as a tax advantage here. For instance, after the divorce, if each spouse owns a percentage of the residence, they can both exclude their own shares of the gain after the sale. In this case, each person has to have lived in the house for at least two years during the five-year period that ends on the home's sale date. In addition, each spouse must have owned a part of the home during at least two years during that five-year portion of time.

Federal income taxes are just one of many issues that can affect a couple's property division process. Other common concerns include safeguarding separate property, understanding debt obligations and figuring out who is responsible for credit cards.

Source: The Wall Street Journal, "When the IRS overlooks a couple's divorce," Bill Bischoff, June 18, 2013

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Attorney Christine K. Lincoln

Christine K. Lincoln offers sound counsel and legal services to protect clients and their families facing divorce and other family disputes.

She will take the time to understand your individual needs and develop a comprehensive solution to protect your rights and interests.

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