Peaceful Divorce

Transfer of Property Incident to Divorce: Tax Benefit

Many of us have worked on cases where the ultimate property settlement was hampered due to lack of liquidity. This often occurs in families where the most significant asset is either a closely held business or real estate.

Often one of the parties requests that the ultimate disposition of these non-liquid assets be finalized some time in the future when the closely held business or real estate interest is sold. He or she further posits that the real value of these assets will only be known with certainty at the time of sale.

Although this is a strong argument, this is often described as a “RFD” (recipe for disaster). There is a significant tax reason not to delay the property settlement until the ultimate sale.

The Internal Revenue Code states that “no gain or loss is recognized to the transferor on a transfer of property between spouses or between former spouses incident to a divorce, nor is the value of the property included in the gross income of the transferee”.

A property transfer is deemed to be incident to a divorce if
* The transfer occurs within one year after the date the marriage ends, OR
* The transfer is related to the ending of the marriage

A property transfer is related to the ending of the marriage if
* The transfer is made under the original or modified divorce or separation instrument, AND
* The transfer occurs within six years after the date the marriage ends.

This tax free transfer of property between divorcing parties is a tremendous tax benefit. If the ultimate transfer does not occur under these rules, the tax consequences could be devastating. For example, let’s assume 50% of the proceeds from the sale of a closely held business are transferred to a former spouse outside the requisite time period. Let’s further assume the company originally cost $100,000 and is valued at $400,000 at the time of the transfer. Tax will be owed on 50% of the $300,000 gain ($400,000 less $100,000) by the transferor. Even if the tax is incurred at capital gains tax rates, the tax is unnecessary.

Views: 11

Comment

You need to be a member of Peaceful Divorce to add comments!

Join Peaceful Divorce

Comment by Cynthia Tiano, Esq. on April 1, 2009 at 10:10pm
Sue, thanks so much for this informative post. I've featured it on the main page.

Cynthia

Become an affiliate of the Happily Divorced! book and audio program! Let Reformed "Killer" Divorce Attorney, Cynthia Tiano, and Dr. Max Vogt, Marriage and Family Psychologist, take you on an adventure into the lives of two families going through the divorce legal system - one doing "legal battle" and the other creating a "peaceful divorce". Learn how to create a Win-Win from their experiences... HappilyDivorced.org


Events

Latest Activity

Robert D. Bordett, CFP, CDFA posted a blog post

How Important Is the Budget in Divorce Planning?

I think everyone’s least favorite word is BUDGET. Why don’t we want to hear that word? Think about it: We’re asking ourselves to do something we don’t want to do — or worse yet, someone else is asking us to do it. While we might not like them, having a budget does help. In divorce planning — whether you are going to litigation,…See More
Sep 18
Robert D. Bordett, CFP, CDFA posted a blog post

21st Century Parenting Plans

I remember when the default custody arrangement had one parent as the custodial parent, and the other parent was known as the “Disneyland parent.” They had their children every other weekend, and maybe once during the week for dinner. Today it is more common to see joint parenting time consist of one week on, and one week off or “two-two-five-five” time,…See More
Aug 15
Robert D. Bordett, CFP, CDFA posted a blog post

Including a Financial Professional in Your Mediation

Very often, couples who are divorcing amicably, or who have straightforward financial situations, will forgo meeting with a financial professional while they go through mediation. Though this may seem logical on its face, “going it alone” may result in unnecessary hardship and inaccurate calculations.  It is easy to simply look at a tax table today and say “I am going…See More
Jul 30
Robert D. Bordett, CFP, CDFA posted a blog post

What About the House?

Going through divorce means dealing with hundreds of details, some more important than others. One detail that merits extra contemplation is how to deal with the marital home.Does one spouse want to keep it because the children still live there? You don't want to disrupt their lives any more than is already happening. What if the children are grown? Do you still need that much of a house?Here are the three most common means of dealing with the house in divorce:Selling the house and dividing the…See More
Apr 24

Badge

Loading…

About

© 2019   Created by Cynthia Tiano, Esq..   Powered by

Badges  |  Report an Issue  |  Terms of Service