When a couple divorces the division of property can affect the tax obligations of each spouse.
When a divorcing couple possesses high value real and personal property assets the tax consequences may become more critical.
There are important and different tax considerations when dividing and transferring ownership of property, including:
- The marital home and other residential properties;
- Cars, boats, sporting watercraft and other vehicles;
- Bank accounts;
- Stock accounts;
- Rental property;
- A family business or other business where interest is invested;
- Pension funds and 401K and IRA accounts;
- Life insurance policies; or
- Intellectual property rights and patents.
The tax implications of dividing property in a divorce are too complex to exhaust in a single post. You should obtain the advice of your tax accountant as to potential tax implications before you sign any settlement documents. Points to discuss in-depth with your tax accountant include but are not limited to:
- Transfer of the marital home;
- Division of pension and retirement accounts; and
- Maintenance (alimony) versus property division.
Marital Home
In general, Section 1041 of the Internal Revenue Code provides that when property is timely transferred from one spouse to a current or former spouse no taxable gain or loss is recognized and the transfer is treated as a gift. Section 1041 applies to property transferred incidental to a divorce or during the marriage.
Talking points:
- Is §1041 mandatory or can either spouse opt out?
- Does §1041 apply where one spouse gives up rights by paying cash or transferring other property?
- Does the fair market value of the property before and after the transfer make a difference?
Pension and Retirement Accounts
Funds in an IRA account can be transferred from one spouse to the other with tax-free consequences when the transfer is properly structured and executed.
It is crucial that transfers of pension and retirement accounts be written into the divorce plan in a clearly stated manner.
A qualified domestic relations order may indicate the percentage of an account balance or benefit payments the other spouse will receive as part of the divorce plan.
The receiving spouse may elect to properly roll the money over into an IRA and postpone taxes until funds are withdrawn from the IRA.
Talking points
- What is a transfer incident to divorce?
- What is a qualified domestic relations order?
- How do they apply in my divorce?
- Does it matter when the transfer is made?
Maintenance (Alimony) versus Property Division
Maintenance (alimony) is money the court orders one spouse to pay to the other spouse during the divorce proceeding or after a divorce judgment is entered to allow the receiving spouse to maintain the lifestyle established during the marriage.
A settlement details the property division between the spouses and specifies the terms for child custody, support, and visitation; and the maintaining of health and life insurance, real property, automobiles, bank accounts, debts, investments, retirement accounts and pensions, college tuition for children, and other assets.
Maintenance (alimony) is taxable to the receiving spouse and deductible by the paying spouse. Generally, the transfer of a property division incident in a divorce is not taxable or deductible. Delineating whether a payment or asset transfer is a property division or maintenance (alimony) may be fundamental to determining any tax consequences.
Talking points
- Can maintenance (alimony) be paid with non-cash assets?
- How is maintenance (alimony) distinguished from a property division?
- Is it wiser to accept lump sum maintenance (alimony) or maintenance (alimony) paid in periodic installments?
- If cash payments will cease upon the receiving spouse remarrying, does that make the payments maintenance (alimony)?
Contact A St. Louis Divorce Attorney
You have worked hard and accumulated wealth and other assets as a result. You aim to be equitable in your divorce but are concerned you may be saddled with a big tax bill once the assets are divided.
Before you sign any settlement documents you should consult with your own tax accountant to advise you as to any potential tax consequences. The Galmiche Law Firm, P.C. can alert you to some of the potential issues, but you will need to obtain the advice from your tax accountant.
Call(636) 552-4841 today for a Free Consultation and speak with Jay Galmiche, a seasoned divorce attorney with 40 years of experience.The Galmiche Law Firm, P.C. serves the areas of Chesterfield, Ballwin, Town & Country, and Wildwood, Missouri, along with surrounding areas.