When property is divided up in a divorce, there are no immediate tax consequences. Therefore, if you transfer your interest in the home to your spouse, it will not result in a taxable gain or loss to either you or your spouse. However, let’s say that your spouse assumes the home at the community basis. Generally, community basis is what was jointly paid for the home plus the cost of improvements that were made. Thus, your spouse would be responsible for reporting any gain in excess of the community basis, when, and if, he or she sells the home. If your spouse qualifies, he or she can exclude the first $250,000 of gain; any part of the gain in excess of the exclusion will be taxable to your spouse.
As part of your divorce tax strategy, and assuming you qualify for the home gain exclusion, you might want to consider selling the home jointly. This will convert the asset to cash, which can then be divided up as part of the settlement. By doing so, you will have a combined $500,000 home gain exclusion and will only be taxed on the amount, if any, in excess of this larger exclusion amount.