FAQs About Real Estate Tax Implications in Divorce
What Divorcing Homeowners and Family Law Attorneys Need to Know
Divorce changes almost everything — your home, your finances, and often your tax picture. When a marital home is sold or transferred, understanding the real estate tax implications becomes crucial.
Even though each situation is unique, there are common questions that arise in nearly every divorce involving real estate. As a Certified Divorce Real Estate Expert (CDRE) serving Phoenix and Scottsdale, I’m not a tax advisor, but I help clients and attorneys understand how real estate decisions during divorce may affect their financial outcomes — and when to bring in a CPA or tax professional for personalized guidance.
Here are the most common FAQs I receive about real estate and taxes during divorce.
1. Will We Owe Capital Gains Tax When We Sell the Home?
Possibly — but many divorcing couples qualify for a valuable tax exclusion under IRS Section 121.
If you’ve owned and lived in your home for at least two of the last five years, you may be able to exclude up to $250,000 in capital gains if filing individually, or $500,000 if filing jointly.
Key points to remember:
The sale doesn’t have to occur while you’re still married, but your filing status and timing can affect the exclusion.
If one spouse moves out during the divorce, the other may still qualify for the exclusion if certain conditions are met.
Accurate documentation of ownership, occupancy, and sale date is essential.
As a CDRE, I ensure that all sale records and settlement statements are organized for your CPA to analyze accurately.
2. What If Only One Spouse Keeps the Home?
When one spouse stays in the marital home and the other moves out, the tax landscape shifts.
The spouse who keeps the home will eventually be responsible for capital gains taxes when it’s sold later.
Because the sale might occur years down the road, that spouse may no longer qualify for the $500,000 joint exclusion, meaning more of the profit could become taxable.
Refinancing to remove the other spouse from the mortgage may also have implications for deductions and ownership basis.
This is why I recommend working closely with both the attorney and CPA when determining whether a buyout or sale makes more financial sense.
3. How Do We Determine the Cost Basis of the Home?
The cost basis is your starting point for calculating gain or loss on a property. It includes:
The original purchase price
Certain closing costs
Documented capital improvements (not routine maintenance)
Tracking this information is critical during a divorce. When I prepare property valuations, I help clients identify past improvements that may increase their basis — like roof replacements, kitchen remodels, or room additions — so their accountant can determine whether those items reduce taxable gain.
4. How Are Proceeds Reported for Each Spouse?
If you sell the home jointly before the divorce is finalized, each spouse typically reports half of the sale on their tax return.
If the home is sold after the divorce, the reporting will depend on what the divorce decree specifies and how ownership was held at the time of sale.
Your escrow company will issue a Form 1099-S showing the total sale proceeds. I always ensure each attorney and CPA receives the closing statement and supporting documents to avoid reporting discrepancies later.
5. Who Can Claim the Mortgage Interest and Property Tax Deductions?
This depends on who paid the expenses and how ownership is titled.
If the home sells mid-year, the deductions for mortgage interest and property taxes are usually split proportionally between spouses, based on who made payments before and after separation.
Because these records can become complicated, I advise both parties to maintain clear documentation of all payments leading up to the sale, making it easier for their tax professionals to allocate deductions properly.
6. What About Deferred Maintenance or Repairs Before Sale?
While routine maintenance isn’t deductible, certain capital improvements — like adding square footage, replacing HVAC systems, or major remodels — may increase your property’s cost basis.
I work with contractors and escrow officers to document improvement expenses so that your CPA can evaluate whether they reduce your future taxable gain.
For divorcing couples, keeping organized receipts can translate to real money saved down the road.
7. How Does the Timing of the Sale Affect Taxes?
Timing is everything in divorce real estate.
Selling before the divorce is finalized may allow couples to benefit from joint tax filing and the full $500,000 exclusion.
Selling after finalization means each spouse files separately, typically limiting the exclusion to $250,000 each.
If one spouse remains in the home temporarily after the divorce, make sure your attorneys and CPA coordinate — otherwise, you risk losing part of your exclusion eligibility.
8. What If the Home Is Sold at a Loss?
While less common in today’s market, some couples sell for less than the purchase price. Generally, losses on personal-use residences aren’t deductible, but selling investment property may allow for certain write-offs.
If the marital home was converted to a rental before sale, that can change the tax treatment. This is another reason why collaboration between your CDRE and CPA ensures accuracy and compliance.
9. What About Investment or Vacation Properties?
Investment real estate introduces new layers of complexity — depreciation recapture, 1031 exchanges, and differing ownership percentages are just a few.
If a divorcing couple owns multiple properties, attorneys often rely on a CDRE for valuation support and clear documentation. From there, the CPA determines tax outcomes, while the CDRE manages market strategy and sale execution.
10. How Should Attorneys Approach Tax Discussions with Clients?
Attorneys don’t give tax advice, but they are responsible for ensuring clients make informed decisions.
Partnering with a CDRE helps attorneys:
Understand how sale timing and valuation impact taxable gain.
Obtain organized documentation for use in disclosures or settlement exhibits.
Reduce the risk of post-decree disputes over missed tax details.
This collaboration creates a smoother process for both the legal and financial sides of the case.
11. Common Mistakes to Avoid
Selling without verifying exclusion eligibility. Couples assume they qualify for the full exclusion but may not.
Failing to track home improvements. Missing receipts can mean higher taxes later.
Delaying sale without evaluating market conditions. Waiting too long can reduce equity and affect filing options.
Ignoring lender or escrow documentation. Incorrect 1099-S forms can trigger IRS questions.
A Certified Divorce Real Estate Expert helps catch these issues early so the team can correct them before closing.
12. When to Involve a CPA or Tax Professional
Always. Even the most experienced CDRE cannot provide personalized tax guidance.
A qualified tax advisor should:
Review sale documentation and cost basis.
Confirm eligibility for exclusions or deductions.
Project the net impact on each spouse’s tax return.
I often introduce clients to divorce-savvy CPAs who understand both real estate and family law nuances, ensuring a fully integrated financial plan.
Final Thoughts: Clarity, Compliance, and Collaboration
Taxes may not be the most emotional part of a divorce, but they can have long-term consequences.
Understanding how your home sale interacts with IRS rules — and surrounding yourself with the right professionals — can prevent financial surprises and preserve more of your hard-earned equity.
As a Certified Divorce Real Estate Expert, my role is to make sure the real estate facts are clear, the documentation is accurate, and the right professionals are looped in at the right time.
📞 Let’s Connect
If you’re selling a home during divorce and need clarity on the real estate side of taxes — or you’re a Family Law attorney who wants a neutral expert to support your clients — I’m here to help.
Barbara Woyak | AZDiivorceRealty.com
Certified Divorce Real Estate Expert (CDRE) • Phoenix | Scottsdale | Paradise Valley | Maricopa County
📧 barbara@azdivorcerealty.com 📞 [480-818-5105
Important Disclaimer: I am not a tax advisor or attorney. The information in this article is for educational purposes only and should not be relied upon as tax, legal, or financial advice. Always consult a qualified CPA or tax professional regarding your specific situation.