What taxes may result from dividing property in divorce?
The task of splitting your marital assets with your spouse in your divorce can involve a lot of financial homework to discover possible tax liabilities. Even though the idea of property division is to make sure spouses receive a fair share, sometimes one or both spouses incur hefty tax bills.
CNBC provides a look at how dividing up some marital assets can generate unexpected taxes.
Taxes on investments
There is a difference between receiving cash and receiving an investment valued at the same amount. An investment such as stock will likely require you to pay taxes on it once you sell it. This means an investment and cash do not have identical values.
Additionally, investments with the same value could incur different amounts of taxes. You could pay short-term or long-term capital gains depending on how long you have possessed the investment.
Taxes on retirement accounts
Be careful how you split a retirement account. Withdrawing money from a 401(k) can invite a 20% withholding tax. The government may add a 10% fee if you are not at least 59 ½ years old.
You can avoid taxes with a QDRO. This is a court order that divides certain retirement accounts. Transferring some 401(k) funds to a rollover IRA prevents you and your ex from paying taxes on the money.
Taxes on a marital home
If you keep your marital house, you will probably refinance the home so it is in your name. However, if you sell the property later on, you may pay significant capital gains taxes on it since you do not receive the tax exclusion level for married couples.
Proper analysis of the tax potential of your assets may help you understand what you will truly receive from a divorce settlement and avoid burdensome tax costs.