If as part of your divorce you and your ex-spouse decide to sell your home, that decision may have capital-gains tax implications. Normally, the law allows you to avoid tax on the first $250,000 of gain on the sale of your primary home if you have owned the home and lived there at least two years out of the last five. Married couples filing jointly can exclude up to $500,000 as long as either one has owned the residence, and both used it as a primary home for at least two out of the last five years.
For sales after a divorce, if those two-year ownership-and-use tests are met, you and your ex-spouse can each exclude up to $250,000 of gain on your individual returns. And sales after a divorce can qualify for a reduced exclusion if the two-year tests haven’t been met. The amount of the reduced exclusion depends on the portion of the two-year period the home was owned and used. If, for example, it was one year instead of two, you can each exclude $125,000 of gain.
What happens if you receive the house in the divorce settlement and sell it several years later? Then you can exclude a maximum $250,000 gain. The time your spouse owned the place is added to your period of ownership for purposes of the two-year test.