Does Divorce Have Hidden Tax Consequences?

 

In divorce, property division agreements that appear fair on their face may have hidden tax implications. The family house is a prime example. Although negotiations may include the fair market value of the real property, a party should also consider the property taxes, maintenance expenses, and appreciation or depreciation of the land and physical structure.

Given our population growth, land generally appreciates because it is in limited supply. However, land value is also be affected by commercial and/or municipal developments in the neighborhood. Appreciation also factors into the value calculations for other types of property to be divided in divorce, including retirement plan assets.

 

What Happens If I Sell Assets After the Divorce?

If a party agrees to a property division settlement with the intention of subsequently selling the affects assets, there may be tax liabilities. Remember, only asset transfers at divorce or directly related to the divorce are without tax consequences. Similarly, withdrawals from retirement accounts specified in a qualified domestic relations order (QDRO) are generally without penalty, but other withdrawals may trigger capital gain taxes.

 

Are There Tax Implications to Paying Child Support?

Although child support is governed by state law, there are federal tax benefits to the parent who claims the child as dependency exemption. Regardless of the legal and physical custody arrangement, the parents can negotiate this exemption. The parent who releases his or her claim to the exemption generally signs a written declaration, which the other parent includes with the federal tax return.

This discussion underscores the importance of having an experienced family law firm review any property division proposals. Even if you and your spouse are cooperating in the divorce, there may be hidden tax issues we can alert you to.

Source: Journal of Accountancy, “Tax considerations when dividing property in divorce,” Ray A. Knight, April 1, 2013

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