Taxes when the house sells or changes hands

Good to know: selling to us does not mean you have to do any of this yourself. A title company handles the closing paperwork.

One spouse keeps it: is that a taxable sale?

The IRS says when a home or a share of one goes to a spouse or ex-spouse as part of a divorce settlement, there's no gain or loss and nothing to report. The broader rule for property says the same for a transfer to a spouse, or to a former spouse if incident to the divorce.

The catch in a buyout. Not taxed now doesn't mean never taxed. Your basis in what you receive is the same as your spouse's adjusted basis, so whoever keeps the house also keeps its old basis for a later sale. Count that when you compare a buyout with cash.

"Incident to divorce" has a definition: within 1 year after the marriage ends, or related to its end under the divorce instrument within 6 years. A later handoff outside those lines needs a look from a tax preparer.

Selling to someone else: the exclusion

Which line you're on depends on your filing status for the year of the sale. That turns partly on whether you have a final decree by the last day of your tax year. So a house sold in March can't count on a joint return if the decree comes that December. The tests include owning the home at least 24 months of the 5 years before the sale, plus a residence test. Run this before you pick a closing date.

I moved out. Did I lose the exclusion?

Not automatically. If you're a sole or joint owner who moved out after a separation or divorce, and your spouse or ex is allowed to live in the home under a divorce or separation instrument and uses it as their main home, you can still treat it as your residence. Notice both conditions. A handshake deal may not count, so ask your attorney how the paperwork should read. This is a tax rule only. It doesn't change who has to sign the deed.

If your spouse transferred the home to you, the time they owned it counts toward your ownership, but you have to meet the residence test yourself.

Selling it together: who reports what?

Each spouse reports their share, and state ownership law sets the share. That's one place the bridge matters. The IRS lists Wisconsin among the community property states, where each spouse is usually considered to own half of community property. Minnesota isn't on that list. A preparer who works on both sides can sort this out.

State transfer costs

Minnesota's deed tax doesn't apply to a dissolution decree or a deed between spouses under it. That exemption doesn't reach a sale to an outside buyer. We didn't tie down Wisconsin's treatment of a transfer under a divorce judgment, so ask your attorney or the register of deeds. The title company lays out what is owed on a sale, in writing, before closing.

This isn't tax advice. We're a home buyer. IRS publications change from year to year, and we read the versions linked below. Your own numbers, your filing status, and when you finalize the divorce all matter. Take this page to a tax preparer.