Page 70 - Family Law Services

ence of state guidelines and should work with counsel to properly apply the guidelines according to state
law.

IRC Section 66

IRC Section 66(a) is only applicable in community property states. It provides relief from the communi-
ty sharing of income, deductions, credits, and payments when the following five criteria are met:

1. The couple is married at some point during the calendar year.

2. The couple live apart an entire year.

3. The couple does not file a joint return.

4. One or both parties have earned income under local law that is treated as community property.

5. None of the earned income under local law is transferred between the spouses during that year.

IRC Section 66(b) provides that the IRS can choose to ignore the local community property law in the
event that one spouse fails to notify the other of either community income or community deductions pri-
or to the due date of the return. If a taxpayer wishes to benefit from this provision, it is recommended
that complete disclosure be included in the filed return.

IRC Section 66(c) provides relief to an innocent spouse if that individual did not know, or have any rea-
son to know, of the community income.

Taxation of the Sale of Personal Residences

Special tax rules apply when dealing with the sale of a principal residence. Married taxpayers can ex-
clude up to $500,000 of gain on the sale of principal residence, whereas individuals, such as divorced
parties, can each exclude up to $250,000 of gain. Taxpayers must meet certain ownership criteria in or-
der to qualify for the exclusion, and they may not use the exclusion more frequently than every two
years.

Ownership and use requirement. One or both of the taxpayers must have owned and used the residence
as their primary residence for two of the last five years, and neither spouse can have excluded a gain
from the sale of a personal residence during the two years prior to the sale. If the sale of the residence
occurs as a result of a change in location of employment or certain other unforeseen circumstances, in-
dividuals can exclude a fraction of those amounts based on the duration of the two-year test that has
been met over the two-year period.

It is common for a divorcing spouse who moves out of the jointly-owned residence to have difficulty
meeting the use test if the home is not sold within two years. Relief for the nonoccupant spouse is, how-
ever, available under IRC Section 121(d)(3)(B), provided certain provisions are included in the divorce
decree.

Under IRC Section 121(d)(3)(B), an individual is treated as having used a home as a principal residence
during any period of ownership while the individual's former spouse is granted use of the home under
the divorce decree. For example, if H and W divorce in 201X and W is awarded use of their jointly-
owned home for 10 years, when they sell the home in 202X, each may claim an exclusion of up to
$250,000.

68 © 2020 Association of International Certified Professional Accountants