Tax considerations of asset division in divorce

You’re likely well aware that one of the most important aspects of a divorce case is the division of marital assets. You also probably have some idea of what you want, and what you could live without, in terms of your own marital property. But have you taken into account the true monetary value of your property when factoring in tax liability?

If you are somewhat familiar with the tax code, your first concern may be transfer taxes, like the federal gift tax. However, under the tax code, transferring property to your former spouse is not a taxable event that results in the recognition of gain or loss, so long as the transfer is “incident to the divorce.” If the transfer occurs within one year of the end of the marriage, it should qualify, as should any transfer made within six years of the end of the marriage so long as it is made under the terms of a written divorce or separation agreement.

However, while gain or loss may not be recognized when property is divided in divorce, it can (and likely will) be recognized later – and this a fact you need to account for when dividing marital property.

For example, imagine that you and your spouse have $10,000 cash in a shared bank account, and $10,000 in company stock. If one spouse wants the liquidity of the cash while the other wants to capitalize on the investment potential of the stock, it would be a fair trade to exchange one for the other in the divorce, right? Well, that depends.

While the cash will not be taxed for a realization of gain, the stock might be. If the stock was purchased at a lower price and has since increased in value, when it is ultimately sold, capital gains tax may be due on the increase. Thus, the stock that has a market value of $10,000 may in fact be worth substantially less than the $10,000 in cash.

Similar calculations need to be made when dividing other kinds of assets in divorce, including real estate. Remember, just because market value appears to be equal, some deeper digging is required to determine whether you are really getting a fair trade off when structuring your property division agreement.