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How capital gains tax plays in to home equity

A previous post on this blog talked about how couples who are splitting, either in a divorce or even after a long-term relationship, must wrangle with property division. During this process, among other decisions, splitting couples must choose how to divide equity in a home that they own or that is legally marital property.

This choice is important since many families have a lot of wealth tied up in their homes. This is particularly true if they have lived in the same Rockford, Illinois, residence for a long time and have been prompt in paying down their mortgages.

As other posts on this blog have also alluded to, one thing that a couple needs to keep in mind during the process is the capital gains tax. Generally, transfers during a divorce are not subject to capital gains tax, but future sales of a home can be.

Subject to some exceptions that apply to one's own residence, a seller is going to pay tax on a percentage of the investment gain they realize upon the sale of a house. In other words, if a lot of their equity comes from appreciation in the value of their home, they should prepare for a heftier tax bill for the year that they sell the property.

In a divorce or legal separation in particular, it is important to keep careful track of how much one might pay in capital gains tax. This tax reduces his or her bottom line which, in turn, means less financial security after the split. It is also important to realize that the person who comes out of a divorce with ownership of the home will not have the same level of exemption from capital gains tax as he or she would enjoy if married.

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