I moved to Canada three years ago to do some post-retirement consulting. My wife and I tried the long-distance thing for a while but it didn’t work. Last October we divorced in Canada, where it was easier to divide her Canadian assets. Even though I’m the one living in Canada, she is the one who is Canadian.
She sold our home in Lincoln in December and we equally divided the proceeds. I am worried about taxes and how to declare the sale proceeds. She just told me I have to pay all of the taxes because she won’t file a joint return and she lived in the house — not me — when it was sold. I thought we would file together because we were still married in 2019. I have to file a U.S. return because of my U.S. pension. If she is right, that means we had a very unequal divorce settlement, which is not what I intended to do.
I don’t know if I can re-open my divorce in Canada to address this inequity or if I can do something in Massachusetts to fix this.
First, don’t panic — you do not need to undo your divorce agreement in order to make it fair.
What led you to believe that you could file a joint return this year? If a lawyer or accountant gave you that advice, you should give them a call and ask why. I cannot speak for Canada, but in Massachusetts, just because you got divorced in October does not mean your divorce would be final. Once the judge approves the divorce, you remain legally married here for another 90 days. In that event, you could still file a joint return. You need to find out if the province in Canada where you got divorced has the same waiting period. If so, have another discussion with your ex-wife about jointly filing taxes — she may not realize the option is on the table.
Assuming you cannot file jointly, you still will not have to pay any more in capital gain taxes from the sale of the house than she will. When an individual sells their primary residence they are entitled to a $250,000 deduction against any capital gains. That amount is doubled for a married couple. However, when a married couple separates and one party continues to live in the house for two of the last five years preceding the sale, the party who does not live in the home can still qualify to use half of the married couple deduction (i.e. $250,000 per individual). Because your ex lived in the home before the sale, you get the deduction too.
So, call your Canadian counsel to figure out if you were still married on Dec. 31, 2019, and then call your accountant and work through the filing/deduction details