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Preserving the $250K Capital Gains Exclusion After Divorce

Updated: 4 days ago















Preserving the $250K Capital Gains Exclusion After Divorce — Even If One Spouse Stays in the Home


As a Certified Divorce Financial Analyst (CDFA®), I often help clients navigate the financial twists and turns that come with divorce. One of the biggest financial assets — and emotional anchors — in any marriage is the marital home. But what happens to the tax benefits when you divorce, and one spouse continues living in the home?


The IRS provides a powerful tax break when you sell your primary residence — the capital gains tax exclusion — and with the right planning, both spouses may still benefit from it even after the divorce.


Let’s break it down.



What Is the Capital Gains Exclusion?


If you sell your home for more than you paid for it, that profit is typically considered a capital gain. Fortunately, the IRS allows:

  • Single filers to exclude up to $250,000

  • Married couples filing jointly to exclude up to $500,000


To qualify, you must meet two main tests:

  1. Ownership Test – You owned the home for at least two of the last five years before the sale.

  2. Use Test – You lived in the home as your primary residence for at least two of the last five years.


You don’t have to live in or own the home continuously — just for 24 months total within that five-year window.➡️ IRS Topic No. 701

 

Post-Divorce Scenarios: Who Gets What?


Scenario: One Spouse Stays in the Home

It’s common for one spouse to remain in the home — often the custodial parent. But can the spouse who moves out still claim their $250K exclusion?


Yes — with smart planning.


Here’s how the moving spouse can preserve their benefit:

  • Keep Ownership: They must remain on the title (and possibly the mortgage).

  • Meet the Use Test: If they lived in the home for at least 2 of the 5 years before the sale, they can still qualify — even if they moved out post-divorce.

However, once 3 years have passed since moving out, that spouse may no longer meet the use test — unless…


The Divorce Agreement Grants Exclusive Use


Here’s the key: the IRS allows a spouse to count the other spouse’s use of the home as their own — if the divorce decree or settlement grants one spouse exclusive use of the home.


That means the non-residing spouse gets to “count” their ex’s residency time toward the use test.

 

Tips to Maximize the Exclusion


  • Sell Within 3 Years of Moving Out: Keeps the use test fresh for both spouses.

  • Keep Joint Ownership Until Sale: Even if one spouse moves out, keeping both names on the title can preserve exclusion rights.

  • Use the Divorce Agreement Strategically: Language around exclusive use and timing of sale is essential.

  • Work with Pros: A CDFA®, tax professional, and divorce attorney working together can help you make the most of this exclusion.



Let’s Talk About Your Next Chapter


Every divorce is different, and the right strategy depends on your specific goals and timeline. I can help you understand the financial side of things and collaborate with your legal and tax professionals to get it right.












Disclaimer

I provide financial guidance as a Certified Divorce Financial Analyst (CDFA®), specializing in divorce planning. However, this article is for informational purposes only and does not constitute tax or legal advice. Please consult a qualified tax professional to ensure you meet IRS requirements, and an experienced family law attorney to properly draft your divorce documents.


 

🔗 Sources

1. IRS Topic No. 701 – Sale of Your Home

2. Morrison Mediation – Minimizing Home Sale Capital Gains Tax in a Divorce

3. IRS Publication 523 – Selling Your Home

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