Tax Implications of Property Transfers During a Divorce

Divorce is perhaps one of the most common legal processes individuals go through. Knowing that doesn’t make it any easier, especially when the decisions you make during divorce can affect your financial wellbeing for years or even decades to come.

The division of assets is a highly contentious part of many divorce cases. In addition to that, how and when assets are transferred can affect each party when tax time comes. This is why it’s important to work with an experienced divorce attorney and CPA to minimize the tax consequences of your divorce.

If you’re just getting started in the divorce process, it’s the right time to hire an attorney to protect your best interests. Reach out to an experienced divorce attorney in your area today.

Federal Tax Law

Under federal tax law, transfers between spouses and former spouses are generally not taxable. This is true as long as the transfer happens “incident to divorce.” This is fairly vague, as it allows couples to retain their right to tax-free transfers as long as they can prove that the transfer was related to the divorce.

This obviously covers property transferred immediately before and after a divorce, but it also provides protection in more complex circumstances. Generally, property transfers more than six years after a divorce are not considered related to the divorce. There are exceptions, though.

Consider, for example, a spouse who unintentionally failed to reveal owned stocks in their disclosure of assets. When they come to light years later and the ex-spouse becomes aware, they go to court to figure out a fair settlement. When the stock-owning spouse transfers half to their ex-spouse, it is considered “incident to divorce” even though the divorce occurred years earlier.

What About Gift Taxes?

Generally, transfers from one spouse to another during marriage or because of divorce are not held to gift tax obligations. These transfers are often considered non-taxable gifts if the transfer is related to a written divorce agreement, required under a court order, or in exchange for a waiver of support obligations.

Home Selling

What happens when no one wants the marital home? You have to sell it and split the proceeds fairly. Depending on the price of your home, you may be subject to a capital gains tax. When you sell the house, each of you can receive up to $250,000 from the sale of the house before the capital gains tax comes into play—as long as you have lived there for at least two of the previous five years.

If one party wants to keep the home and buys out the other party, you do not have to worry about the capital gains tax. In this case, the buyout is related to a divorce.

Income-Producing Assets

While the transfer of income-producing assets may not lead to immediate changes in taxes, it can affect both parties for years to come. When an income-producing asset is transferred, the tax obligations of that asset go with it. This ensures that the person receiving the money from the asset is also required to pay the taxes that come with it.

Income producing asset transfers can lead to issues if the person receiving the asset has never handled their own taxes before or has not planned for the tax consequences of an income-producing asset. This is why it’s recommended that divorcing couples each hire CPAs to handle their post-divorce finances and taxation changes.

Considering State Laws

On top of the complexities of federal tax law, remember that state laws vary. What is not taxable under federal law could still be taxable under state law, hitting one party with a surprise bill at the end of the year.

This highlights the importance of working with an experienced divorce attorney throughout the dissolution process. These kinds of financial decisions can have profound impacts on your future, and you need experienced professionals who can help you make the right decision for you. Your attorney may recommend working with a CPA to plan ahead for your taxes.

While divorce is never an easy decision to make, you can make it easier on yourself with the help of an experienced attorney. Contact a reliable and compassionate divorce attorney in your area today.