The tax consequences of divorce can be numerous and difficult to navigate. Lindemeyer CPA understands these transitions and knows how to navigate the tax consequences as a result of a divorce. Here is a brief explanation of tax consequences when a marital home comes into play and that home has appreciated in value since the date of purchase.
If a home was purchased in joint names during the marriage for $100000 and is now worth $400000 but the home has been awarded to your spouse with the condition that you will receive $400000 in other assets you might think that the law would consider you to be selling your one-half interest. If that was the caseyou would have a basis of $50000 or one-half of the home’s original purchase price in return for $200000 share of the other assets and tax on the difference. Fortunately the law does not work that way and you will not recognize any gain or tax on a transfer to a spouse or former spouse when it is considered “incident to divorce.”
The above example is less favorable to the spouse in possession of the house. If there were a sale to purchsae the house from the ex-spouse your spouse’s basis in the home would be $250000 of which $50000 is for the original one-half interest and $200000 for the purchased interest. If the home was sold for $400000 there would be a $150000 capital gain for your spouse. However because the transfer to your spouse is not considered a sale or taxable your spouse’s basis is now limited to the original $100000 purchase price.
Because the original basis carries over to the recipient spouse the carryover basis rule applies here whether the home was originally owned by both spouses as tenants by the entirety joint tenants with right of survivor-ship tenants in common or community property or a similar form of ownership or by one spouse alone. The rule also applies regardless of who gets the house and whether or not the recipient pays any consideration to the other spouse.
When negotiating a divorce settlement it is important to consider the impact of the carryover basis rule on your potential future tax liability. In the above example although the spouse awarded the home has a property valued at $400000 and you now have $400000 in cash your spouse will face a $300000 tax gain when the home is sold. Under the exclusion that applies to gain from the sale or exchange of a principal resource your spouse may be able to exclude up to $250000 of the gain from her gross income when she sells the home but your spouse may insist that you should get less than $400000 to equalize the fact that she could face tax down the road.
The same “incident to divorce” and carryover basis rule apply to most types of property that is transferred in a divorce not just the marital home. There is an escalating concern for equalization when splitting highly appreciated assets for which no tax breaks apply when they are sold.
Before making any permanent decisions on property or asset division or transfer it is best to gain information from your tax professionals at Lindemeyer CPA who can walk you through these decisions and make recommendations that will best fit your situation and will stay in compliance with tax provisions. Click here if you would like to set up an initial consultation to discuss asset division or tax consequence situations you are currently facing.