The Taxpayer Relief Act of 1997 did give some real relief to one class of taxpayers -- ex-spouses who move out but still retain part ownership in the family home.

In a typical arrangement, one of the couple, often the ex-wife, remains in the home with the children until the youngest child reaches the age of 18. At that point, it is commonly arranged, the house will be sold and the proceeds divided between the ex-spouses.

In the past, when the house was eventually sold the spouse who had moved out owed capital gains tax on his or her share of the profit. The IRS held that no special homesellers' tax breaks could be claimed, because the property was no longer their main residence.

All that has now changed.

As long as one spouse or ex-spouse remains in the home under a legal divorce or separation agreement, each may claim a homesellers exclusion from federal capital gains tax when the property is sold. The maximum excluded gain is $250,000 for an individual or a married person filing singly. If either ex-spouse had remarried, that person's share of gain could be excluded up to $500,000.

That assumes, however, that the owner remaining in the home meets the minimum qualifications for use of the exclusion --at least two years' ownership and occupancy during the five years before the sale.

This tax break can be used more than once, as often as every two years. But neither the person claiming the exclusion nor their new spouse (if there is one) can have used this particular tax break on the sale of another main home less than two years before this sale.

The 1997 tax law made no changes in the long-standing rule that no tax consequences follow from the transfer of property between husband and wife or "incident to a divorce". Thus there would be no capital gains or gift tax complications if one spouse, for example, was granted complete single ownership of the homestead.

Published: January 11, 1999

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