Capital gains tax and property division in divorce
Tax considerations are important as you and your spouse divide property during divorce. If you have significant and/or complex assets, it’s wise to have your tax and financial professionals on your divorce team to advise you and your legal counsel as you determine what you want to seek.
One concern that many people have is whether they’ll need to pay capital gains tax on property they get in the divorce. For example, if your spouse signs over the title to your beach house up the coast, do you have to pay capital gains tax based on the difference between its purchase price and what it’s worth now? You might have the same question about stocks that have increased exponentially in value if they’re offered to you in exchange for something else.
The good news is that divorcing couples typically don’t have to report capital gains on assets transferred “incident to the divorce.” The IRS recognizes that considerable assets change hands every year that fit this description, and it doesn’t require people to report capital gains (or losses) on their tax returns.
Know the timeline
Most transfers are made soon after the divorce is finalized (if not before). That’s why assets transferred within 12 months after the divorce decree is signed don’t require any documentation to prove that they were made as part of the divorce agreement.
The law recognizes that divisions and transfers of complex assets like businesses and land can take longer to finalize. That’s why transfers made after 12 months but prior to six years following the divorce decree are also considered “incident to the divorce” as long as they’re included in the original divorce settlement or any modification approved by the court.
It’s rare that an asset transferred more than six years following a divorce would be considered part of it. However, if you have something that fits that category, you’ll likely need thorough documentary evidence if you want to avoid capital gains tax.
As noted, it’s always wise to have sound legal and tax guidance along with experienced legal guidance as you proceed through your divorce. Just like your legal professional, your tax and financial advisors should be your own – not those you’ve shared with your spouse. You want to ensure that everyone on your team is looking out for your best interests.