Divorce Settlement Tax Law

Income received from a divorce home sale is not taxable if it meets the IRS' gains exclusions.

Certain terms incorporated within a property settlement agreement or divorce settlement may have federal tax implications. Typically, a transfer of property during refinancing does not trigger gain or loss recognition.

Effects

The Internal Revenue Service (IRS) taxes alimony payments to the spouse who receives them and allows a tax deduction for the spouse ordered to pay the alimony. Taxpayers must include language in the divorce settlement agreement that the payments are alimony payments.

Considerations

The IRS allows the child support recipient to exclude the child support payments as income on its federal tax returns for the child's behalf. The IRS does not allow the taxpayer ordered to pay child support to take a deduction. Again, the taxpayers must include language in the divorce settlement agreement that the payments are child support payments.

Benefits

Transferring assets between spouses such as a house may allow the taxpayer to receive residential sales' proceeds as nontaxable income in certain circumstances. Tax laws allow divorcing spouses to receive a tax-free $250,000 exclusion from income if the taxpayers lived in the home for the last two out of five years preceding the sale. The taxpayers must have used the property for personal purposes and not as investment property during these two years.

References

• Internal Revenue Service: Publication 504

Resources

• Lawyers.com: Divorce and Taxes