Knight on Family Law - Tennessee Family Law Blog - Tennessee Divorce Law Blog: Preserving Capital Gain Deduction

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Wednesday, July 13, 2005

Preserving Capital Gain Deduction

Most people know that they can enjoy a generous capital gain deduction if they sell property that they have used as a principal residence for at least two of the five years preceding the sale. But what happens if you divorce and your ex-spouse continues to live in the house? Or what if you just separate and allow your spouse to live in the house?

Under IRC § 121(d)(3)(A) your spouse's or ex-spouse's use of the house as a principal residence counts for you too. If you divorce, your ex-spouse must have been given use of the property under a "divorce instrument," which is "a decree of divorce or separate maintenance or a written instrument incident to such a decree" or a decree "requiring a spouse to make payments for the support or maintenance of the other spouse." If you are separating, your spouse must have been granted use of the property under a written separation agreement.

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