Getting Divorced as a Property Owner During Tax Uncertainty

Taxes are often a very important issue in most divorces. While any transfers incident to a divorce are not taxable events, the future sales of those assets is a very important component that needs to be considered when you are deciding which assets you want to keep after the divorce. 

In recent years there have been quite a few changes in the tax codes that have had significant impacts on divorcing couples, such as changes in the tax treatment of alimony by the federal government and dependency exemptions relating to claiming children. The current administration is proposing yet more changes that could have an even more significant impact on divorcing couples and something you need to consider if you are in the midst of a divorce or about to file for divorce. 

What You Need to Be Aware Of 

The current administration has proposed an increase on all capital gains tax and a limitation of 1031 (“like kind”) exchanges. The increase in capital gains tax that is proposed is 39.5%. This would have a significant impact on all investment, including property, stocks, bonds and other assets.  In limiting 1031 or “like kind” exchanges it would also do away with a valuable strategy for deferring all capital gains tax when you make a similar investment. Thus property owners can “exchange” one property for another similar property without having to pay capital gains tax. 1031 exchanges are often used by business owners for the purposes of moving business locations. The Biden tax proposal doesn’t eradicate 1031 exchanges, just reduces them. The reductions would mean an individual could defer paying tax on gains of $500,000 and a couple could defer paying tax on $1 million. Currently, there are no limits on how much tax you can defer. 

Why It’s Important If you Are Getting Divorced

When people get divorced, standard of living and wealth is automatically reduced due to the cost of maintaining two households instead of one. Many people sell their property when they get divorced as a way of turning the property into liquid cash that can be more easily divided and benefiting from any advantages in the market. The question for high net worth couples who are getting divorced is what moves to make right now to ensure your divorce doesn’t take a significant dent out of your assets.  

Most divorcing couples are able to resolve their divorce by an agreement and do not need a change to make the final determinations. The result of these agreements is not always that each asset class is divided evenly, rather one party may want to keep the marital home, so they offer to allow the other spouse to keep more retirement assets or other investments in exchange. The recent proposed changes to more than double the capital gains tax on investments needs to be factored in to this decision as well the current inflated housing market. 

It is important when considering a divorce that you find a lawyer who understands how these complicated tax issues may impact your assets now and, in the future, so that you can make an informed decision about how to proceed. If you are considering retaining a high net worth divorce attorney and want to understand all your options, then please call us at (978) 341-5040 for a consultation today.

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