how property transfer can affect your taxes

Tax Implications of Property Transfers During a Divorce

In case divorce wasn’t already hard enough, you also have to think about how your divided marital assets will affect your taxes. If your transferred assets are not managed properly, you could face serious tax penalties and other fines. This could significantly cut into what you take away from the marriage.

Wondering how you can protect yourself and your financial future during a divorce? Let’s sit down and talk about your options. Call Coumanis & York at 251-990-3083.

Are Divided Assets Subject to Tax Penalties?

In most situations, assets that are divided during a divorce do not have any tax liability. The government does not want to penalize divorcing couples by further affecting their finances at a time when money is already tight. However, this does not mean that you can make division decisions and transfers without careful planning. If you plan on selling any assets, you’ll need to talk to an attorney before you move forward.

Capital Gains Tax

This is because of the capital gains tax. Consider, for example, your marital home. If you get the marital home and turn around and sell it, you’ll be hit with a capital gains tax on the amount of equity your home has gained since you bought it. There are some exceptions, however.

If the home is your principal residence and you have lived there for at least two years in the five years prior to the sale, you can exclude the first $250,000 of gain from the home sale. A vacation home does not fit this exception, so no matter what, you will be taxed if you sell a second home or vacation home.

Stock Options, Retirement Funds, and Other Complex Assets

Some types of assets are more complicated than others during a divorce. Retirement funds, stocks, and similar assets all have their own laws, penalties, and fee schedules. With stock options, for example, your tax implications depend on whether or not the stock options are qualified. Furthermore, stock options may even not be part of your marital assets, depending on why they were awarded.

Retirement accounts are also somewhat complicated when it comes to divorce. In most cases, you want to simply roll over your funds from your spouse’s account to yours. A QDRO or qualified domestic relations order allows one part of a retirement plan to be given to a divorcing spouse without further intervention.

Even with a QDRO, though, you’ll likely be hit with fees and penalties if you do not roll over the funds into a new account. This would be considered a cash-out, and cashing out your retirement funds will lead to a significant chunk taken out in taxes and penalties.

This doesn’t mean that it’s never worth it to cash out your share of a retirement account. However, before you do so, you should know the consequences of your choices and make an informed decision.

Assets Split Up Outside of the Marriage

There are some situations where ex-spouses have transferred assets after the divorce is over. This is not recommended. This takes you outside the protection of asset transfers done during divorce and exposes you to tax penalties and other issues.

Consider, for example, one spouse finding out long after a divorce that the other spouse had other assets stashed away that they forgot to declare. They may demand a fair share of the asset’s value in exchange for not taking them to court. In this situation, though, going to court may actually be the better solution. It ensures that all transfers are above board and within legal parameters, which can protect both parties from tax issues.

When it comes down to it, asset transfers and taxes are very complicated areas of divorce. You must work closely with a divorce attorney before making any binding agreements with your spouse or taking steps to transfer any assets.

Reach Out to Coumanis & York for Help with Your Divorce

There’s no shortage of important decisions to make during a divorce, but with the help of an experienced attorney, you can make choices you feel confident about. If you’re ready to get more personalized advice regarding your divorce, call Coumanis & York at 251-990-3083 or get in touch online.

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