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Publication 523 says that if you are a sole or joint owner and your former spouse is allowed to occupy the home under a divorce or separation instrument and lives there as a principal residence, you treat the property as your own residence. Your CPA applies it to your dates.
By Marc Cormier
Licenses: Maryland #620443 | Virginia #0225175181 | DC #SP98365998 | Berkshire Hathaway HomeServices
27+ years in real estate. 800+ closed transactions.
Certified as a Certified Divorce Real Estate Expert (CDRE) in 2014.
Last updated: October 2, 2026
IRS Publication 523 (2025) covers this case. You are a sole or joint owner. Your former spouse is allowed to occupy the home under a divorce or separation instrument. Your former spouse lives there as a principal residence. Then you treat the property as your own residence for the exclusion.
Publication 523 defines a divorce or separation instrument in three ways. It is (a) a decree of divorce or separate maintenance or a written instrument incident to it, (b) a written separation agreement, or (c) a decree requiring a spouse to make support or maintenance payments.
IRS Topic no. 701 sets the base tests. You exclude up to $250,000 of gain, or up to $500,000 if you file a joint return with your spouse. You must own the home at least 24 months of the last 5 years before the sale. You must use it as a residence at least 24 months of the previous 5 years. On a joint return, either spouse meets the ownership test and both meet the use test individually.
Maryland Family Law Article section 8-208(d) adds one point. An order granting sole possession does not affect the other party's right to claim the family home as a principal residence for tax purposes.
Next step: write down your move-out date, your purchase date, and the date of the instrument. Give all three dates to your CPA before you list.
This is simple counting, not a tax ruling. The window is the 60 months before the sale. Made-up timelines.
| Timeline | Ownership in the 60 months | Months you lived in the home | Months after you move out | Instrument in place and former spouse lives there | Simple count of use |
|---|---|---|---|---|---|
| 1. Own and live in the home 6 years, move out 12 months before sale | 60 | 48 | 12 | Yes | 48 + 12 = 60 |
| 2. Buy the home 36 months before sale, move out 18 months before sale | 36 | 18 | 18 | Yes | 18 + 18 = 36 |
| 3. Own the home 10 years, move out 40 months before sale | 60 | 20 | 40 | No | 20 |
Check the math: Timeline 1 is 60 months minus 12 months, which is 48 months lived. Add the 12 months after the move to reach 60. Without the instrument rule the count is 48. Timeline 2 is 36 months owned minus 18 months after the move, which is 18 months lived. Add 18 to reach 36. Without the instrument rule the count is 18, below 24. Timeline 3 is 60 months minus 40 months, which is 20 months lived. With no instrument, the simple count stays at 20, below 24.
Your CPA applies it to your dates.
I have seen this mistake before. A spouse moves out in month one of a separation. Nobody signs a written agreement for a year. The dates drift, and the paperwork does not match the move.
This is where people usually get hurt. They guess at the dates and find the gap after the sale.
Only on gain above your exclusion. Under IRS Topic no. 701, you exclude up to $250,000 of gain, or up to $500,000 on a joint return with your spouse, if you meet the ownership and use tests. Your CPA confirms your case. State tax and Maryland transfer and recordation taxes are separate questions for your title company.
The $500,000 figure applies when you file a joint return with your spouse. Either spouse meets the ownership test and both meet the use test individually. Otherwise Topic no. 701 sets up to $250,000. Whether two former spouses each apply $250,000 to a half share is a question for your CPA.
Topic no. 701 says you must have owned the home at least 24 months of the last 5 years before the sale. You must have used it as a residence at least 24 months of the previous 5 years. On a joint return, either spouse meets the ownership test and both meet the use test individually.
Montgomery County
The Montgomery County Circuit Court runs a Family Law Self-Help Center. It is a free walk-in clinic staffed by attorneys, in the South Tower, First Floor, Room 1500. It gives general legal information or limited legal advice on divorce, custody, and related matters. You still pay case fees and costs.
Source: https://www.montgomerycountymd.gov/circuit-court/services/family-law-self-help-center
You should have your own. I am a real estate agent. I do not give legal advice, and I do not work for one spouse against the other.
I am not affiliated with any law firm. I do not recommend one attorney over another. Your spouse needs their own attorney, not yours.
If you need to find one, start with these bar association resources:
Links open in a new tab.
| What an attorney handles | What I handle |
|---|---|
| Who gets the house and the money | The value of the house |
| The marital settlement agreement | The net sheet |
| Court orders that affect the sale | Listing, showings, offers, and closing |
| Custody, support, and everything outside real estate | A written record of every showing and decision |
General information only. Not legal, tax, or financial advice. The referral services are independent of me. I do not guarantee any attorney's work or results.
Licenses: Maryland #620443 | Virginia #0225175181 | DC #SP98365998 | Berkshire Hathaway HomeServices
Co-author of "Cracking the Real Estate Code," a best seller in four Amazon categories on release day, September 2013.1
1. PRWeb, September 13, 2013.
Certified as a Certified Divorce Real Estate Expert (CDRE) in 2014.
General information only. Not legal, tax, or financial advice. Examples use made-up numbers.
15 minutes. Free. No pressure.