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Divorce and Sale of the Principal Residence
The division or other disposition of the marital residence has always been a major issue in most divorces. Given the tremendous increase in the value of homes in recent years, the economic and tax concerns of dealing with the marital residence are even more acute for clients and their advisers. The general rules governing income taxation on the sale of a residence were enacted as part of the Taxpayer Relief Act of 1997, Public Law 105-34, which became effective Aug. 5, 1997. Prior rules concerning home sale rollover, or exclusion of gain by certain older taxpayers, are generally no longer relevant and not discussed in this article.
General Rule Concerning Sale of Home
In general, the tax law is codified in Internal Revenue Code of 1986 (“Code”) Section 1001. The gain from the sale of property generally equals the excess of the amount realized over the adjusted tax basis, unless another specific statutory exception applies to reduce or eliminate that gain. This is generally investment, less depreciation, plus improvements. In the case of a marital residence, the only statutory provision relevant to reducing or eliminating gain on the sale of your client's residence is Code ' 121, Home Sale Exclusion. The “residence” might include a houseboat, house trailer or stock in a cooperative corporation. Prior Treas. Reg. Sec. 1.1034-1(c)(3)(i); Rev. Rul. 74-241, 1974-1 C.B. 68, Rev. Rul. 90-35, 1990-1 C.B. 48. Personal property (such as furniture) will not qualify. Caution should be exercised when relying on authorities under prior law.
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