Only principal residences qualify for the home sale gain exclusion break. So, there are no special tax breaks if you sell a vacation home before or after a divorce.
While you might consider co-owning a vacation home with your ex, that option may not be realistic for many divorcing spouses. Other options are:
- Selling the home and paying the tax hit (if any), or
- Having one spouse buy out the other’s share.
If you chose the buy-out option, there are no federal tax consequences for either party if you get the buyout done:
- Before the divorce is final,
- Within one year after the divorce is final, or
- Within six years after the divorce is final and as a condition of the divorce agreement.
In most cases, it’s better for everyone to execute the buyout sooner, rather than later.
Important: Federal-tax-free treatment for a vacation home buyout is unavailable if your soon-to-be-ex is a nonresident alien. The buyout could be treated for tax purposes as a gift or a taxable purchase/sale transaction. Consult your tax advisor if this is your situation.
