Selling the family home during a high asset divorce in Illinois may seem straightforward, but the timing of the sale affects how much you will pay in taxes.
In fact, federal law provides an exclusion of up to $500,000 in capital gains for married couples filing jointly, but only $250,000 for each single individual.
That is why deciding whether to sell before or after the divorce requires clear calculations and a legal and tax strategy designed to protect the value you have built over the years.
In this guide from KHK Family Law & Divorce Attorneys, you will learn the key rules, common mistakes, and realistic options. Keep reading to protect your assets today.
Why the Family Home Matters So Much in a High Asset Divorce in Illinois
For many families, the home represents their most valuable and emotionally significant asset. In addition, in high-value areas, the appreciation accumulated over the years is often substantial.
Therefore, selling the home does more than divide an asset; it also creates significant tax consequences. If no one calculates them, one spouse risks paying more.
Furthermore, the Illinois divorce law requires the judge to consider tax consequences when dividing property. As a result, taxes are part of the negotiation.
The Home as Marital Property
Under Section 503 of that law, property acquired by a couple during the marriage is presumed to be marital property. In simple terms, both spouses have a legal interest in it.
However, if one spouse purchased the home before the wedding or inherited it, the analysis changes. In these cases, it is important to carefully review each contribution.
In addition, Illinois does not automatically divide property equally. Instead, the judge seeks a fair and equitable distribution, which does not always mean an exact fifty-fifty split.
The Federal Exclusion for Selling Your Primary Residence
The IRS Publication 523 explains that homeowners who sell their primary residence are eligible to exclude up to $250,000 in capital gains. For married couples filing jointly, the limit increases to $500,000.
An exclusion means that the excluded portion of the gain is not subject to federal income tax. However, the exclusion is not automatic because you must meet several specific requirements:
- Own the home for at least two of the five years before the sale.
- Use it as your primary residence for at least two of those five years.
- Not have claimed the exclusion on another home sale during the previous two years.
Additionally, to qualify for the full $500,000 exclusion, only one spouse must meet the ownership test, but both must meet the use test and file a joint tax return.
How Capital Gains Are Calculated
Capital gains are not the same as the sale price. Instead, the gain is calculated by subtracting the home’s adjusted basis from the amount realized on the sale. The adjusted basis generally reflects what you paid for the property, plus qualifying adjustments.
For example, the basis includes the purchase price and certain major improvements, such as an addition. Therefore, it’s important to keep the following documents before negotiating the sale:
- The deed and closing documents from the original purchase.
- Receipts for improvements, such as additions, new roofs, or renovations.
- Records of selling expenses, including real estate agent commissions.
- Records of any use of the home as a home office or rental property.
Selling the Home Before the Divorce
While they are still married, spouses may file a joint tax return if they qualify and choose to do so. In fact, the IRS considers a couple married until they receive a final divorce decree.
Likewise, your marital status on December 31 determines your filing status for that tax year. Therefore, in a high-net-worth divorce in Illinois, the date of the divorce judgment matters.
Selling before the judgment may offer several clear tax advantages, particularly when the gain exceeds $250,000 per person. The most important benefits for the couple include:
- Access to the exclusion of up to $500,000 when filing a joint return, if all requirements are met.
- Dividing the sale proceeds instead of dealing with a home that is difficult to split.
- Less uncertainty about future market values.
- A simpler negotiation over the remaining assets.
Selling the Home After the Divorce
After the divorce judgment, each former spouse files separately. Consequently, each may claim an individual exclusion of up to $250,000, provided they meet the applicable requirements.
The problem arises when one spouse moves out. If that spouse no longer meets the residence-use test, they may lose part or all of the exclusion. However, federal law provides protection in certain circumstances.
When One Spouse Stays in the Home
According to IRS Publication 523, if your former spouse lives in the home under a divorce or separation instrument, that time may count as your own use of the residence.
A divorce instrument is a divorce decree or a written separation agreement. Therefore, the document should clearly address these key details about the property:
- Who will live in the home and for how long.
- When the property will be sold and under what conditions.
- How the sale proceeds will be divided.
- Who will pay the mortgage, property taxes, and maintenance costs.
Transferring the Home to the Other Spouse
Another option is for one spouse to transfer their ownership interest to the other. According to IRS Publication 504, a transfer made because of a divorce generally does not trigger a gain or loss.
However, the spouse receiving the home also takes over the other spouse’s tax basis. In other words, when the property is eventually sold, the gain is calculated using the applicable carryover basis rather than the home’s current market value.
Therefore, in a high-net-worth divorce in Illinois, accepting the home in exchange for other assets requires comparing the future tax burden of each option.
Illinois Taxes and Other Selling Costs
In addition to federal taxes, Illinois taxes gains that are not excluded. According to the Tax Foundation, the state has a flat income tax rate of 4.95%.
Illinois does not provide a lower tax rate for capital gains. Instead, it includes them in taxable income and applies the same rate.
Additionally, Illinois, Cook County, and several municipalities impose taxes on property transfers. Real estate commissions and closing costs also reduce the final proceeds.
When the Gain Exceeds the Exclusion
In a high-net-worth divorce in Illinois, when the gain exceeds the federal exclusion limits, the excess is generally subject to capital gains tax.
Additionally, high-income individuals sometimes face extra tax liabilities. Therefore, before setting the sale date, it’s important to review the following factors with a tax advisor:
- The federal long-term capital gains tax rate, which depends on your income.
- The 3.8% federal Net Investment Income Tax.
- Illinois’ flat 4.95% income tax rate.
- Any portion of the gain attributable to depreciation if you used the home as a rental property or for business purposes.
How a Divorce Attorney Helps With the Home Sale
Selling a home involves family law, taxes, and finances at the same time. Therefore, coordinating with your attorney and tax advisor from the beginning is essential.
At KHK Family Law & Divorce Attorneys, our family law attorneys handle property division cases in Chicago and Cook County. We guide you through this critical stage by providing:
- An analysis of whether the home is marital, nonmarital, or mixed property.
- Clear agreement provisions covering occupancy, the sale, and the distribution of proceeds.
- Coordination with your tax advisor to compare different scenarios.
- Negotiation of the home’s allocation in relation to the remaining assets.
This way, in a high-net-worth divorce in Illinois, every decision about the home is supported by clear financial calculations and a legal strategy tailored to your family.
FAQ
Do I Pay Taxes if I Transfer My Share of the Home to My Former Spouse?
No. If the transfer occurs because of the divorce, it generally does not trigger a gain or loss. However, your former spouse also receives your tax basis for purposes of calculating future gains.
Who Pays the Mortgage While the Home Remains Unsold?
The parties may negotiate this issue in their agreement, or the judge may decide it. Therefore, it’s important to put the arrangement in writing. If you’d like to discuss your situation, contact our team today.
Contact KHK Family Law & Divorce Attorneys
The family home represents years of hard work and memories. Therefore, selling it with a clear strategy protects both your assets and your peace of mind during a difficult time.
If you’re facing a high-net-worth divorce in Illinois, the team at KHK Family Law & Divorce Attorneys will help you make informed decisions. Schedule your consultation today.
