Capital Gains

• If one spouse buys out the other spouse, it may result in complications when the home is eventually sold. The spouse that receives funds for the home has three years to sell the home without having to pay capital gains taxes on the sale. However, if that spouse sells the home more than three years later, he might have to pay large capital gains taxes because he's missed the exclusion window.
  
  

Exclusion Amount

• Married couples are allowed a $500,000 exclusion from capital gains if they sell their home. If one spouse buys out the other after a divorce, the remaining spouse can still take the $500,000 exclusion if she sells the home within three years. If she waits more than three years, she can only take a $250,000 exclusion, and her basis in the property doesn't include the money her ex-spouse paid her.
  
  

Older Couples

• If both members of a divorcing couple are over the age of 55, different tax rules apply. In this case, each spouse is entitled to a capital gains exclusion of $125,000 no matter when he sells the home. Thus, for these couples, it makes more sense to sell the home prior to divorce than for one spouse to buy out the other. If the couple jointly owns the home, they can take a $250,000 exclusion to capital gains instead of a $125,000 exclusion.
  
  

Tax-Free Transaction

• If one spouse buys out the other during a divorce, there is usually no tax on the income the receiving spouse gets. The paying spouse must buy out the receiving spouse within one year of the date the divorce is finalized. Otherwise, the buyout funds become fully taxable, which can be a serious problem.