Divorce, IRS Style

Home sales. If selling a home is the byproduct of a divorce or separation, you might need to do some finagling to ensure you don't lose out on one of the best tax breaks available: the exemption of $500,000 in gain on the sale of a home, which drops to $250,000 if the seller is single. If you know you'll need to sell and the gain on your home (the amount it has appreciated since you bought it) is more than $250,000, consider trying to sell while you're still married.

When one spouse decides to stay in the home, he or she often "buys out" the spouse who leaves. Doing so doesn't prompt an immediate taxable event for either party (the amount is not taxable to the recipient), but it could have some longer-term repercussions to the spouse who stays. That's because the cost basis of the home won't change, even though the remaining spouse, in essence, increased his or her equity. That means a bigger gain when the remaining spouse eventually sells the home. If that's a fear, consider ways of increasing your basis -- make sure you've properly recorded all money spent on home improvements -- that gets added onto your basis dollar for dollar.

Amid whatever legal wrangling that may be involved in your split, you'll also need to make sure you see a tax attorney or CPA to ensure you're aware of the tax consequences of all your actions. You don't want to involve other people in this painful process -- least of all your Uncle Sam.

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