Selling the House Prior to The Divorce
If neither one of the partners can afford to maintain the house separately, it makes sense to try and sell the house before it becomes a financial burden. Selling the house prior to the divorce may provide needed cash for both parties, and also disposes of the most expensive illiquid asset for most couples. Additionally, there is no issue as to the valuation of the house. Often, the couple may end up selling the house for less than full market value to dispose of the asset quickly; much of this is dependent on market conditions.
A real plus to this alternative is that the emotional baggage of who keeps the marital house is eliminated and both parties can move on to their own homes. Additionally, neither party needs to worry about who will make future repairs. In this situation, if there is a gain or if they have paid off a significant part of the mortgage, each party will have the necessary cash to purchase another residence or use for other purposes, and start life anew. So long as you fit the criterion from Scenario 1 from above, you will not owe any taxes on capital gains. Note that you no longer need to purchase another residence or worry about rolling over gains. You get to pocket your gains immediately. A nice windfall for most divorcing couples and something that makes the division of other marital assets much simpler.
If you do have gains over $500,000, you can settle this bill quickly, and then move on with your lives. Again, as long as you have both owned and occupied this as your principal residence for at least two of the five years, you only have to pay tax on the gains over $500,000. Again, if you and your spouse file a joint return for the year of the sale, you can exclude the gain if either spouse meets the ownership tests.