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Family law divorce settlement may raise important tax issues

On Behalf of | Oct 25, 2018 | Family Law |

When negotiating a divorce settlement in Missouri, litigants may face tax ramifications from property and support issues that are involved. One tax rule that impacts family law negotiations, for example, is that a sale of real estate by husband and wife that was used as a primary residence for at least two of the past five years allows for a tax exclusion up to $500,000 if filing jointly or up to $250,000 each if filing separately. Each person seeking the exclusion must prove having lived in the property as a primary residence for two out of five of the previous five years.

The residency hurdle may be problematic for some divorcing spouses. If a spouse moves out of the home, the clock will begin ticking on the five-year period that is used to compute the two years of residency. In other words, the longer the spouse is out of the home the shorter becomes the time for qualifying by proving two of the preceding five years were spent there in primary residency. Other complications may have to be considered, including temporary separations and similar deviations in determining one’s eligibility.

If that particular tax benefit is important to one or both parties, they must keep in mind the passage of time and its impact on having the right to claim the exclusion. The attorney will explain the rule and its benefits along with providing cautionary instructions on the time requirements. The divorcing party, however, will have to remain vigilant going forward so that the requirements are not overlooked.  

The savings from just that one tax can be considerable where a couple sells the house and obtains up to $500,000 in gains. The tax payment on a gain of $500,000 from such a sale could be over $100,000. Where there are substantial property assets involved in a Missouri divorce, advice from the family law attorney as well as from a separate tax specialist will be in order before agreeing to a resolution of such matters.

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