Dividing Property in Divorce Is A Tax Free Proposition
Dividing property between spouses in divorce (and under certain circumstances after marriage) results in no tax liability for either spouse. See Section 1041 of the tax code. This means you can divide up property between spouses without concern that the division will be a taxable event. (If one spouse is not a citizen different rules can apply) However, when you divide property, you’d better consider future taxes and the tax basis of the property in addition to its fair market value. For instance if one spouse is awarded the family residence which has greatly appreciated over time then that spouse may get nailed with capital gains taxes. For example if the couple bought the house for $50,000 twenty years ago and the spouse who receives it in the divorce sells it two years later for $550,000 that spouse faces gains of $500,000 ALL of which are taxable only to that spouse.
High net worth individuals with varied assets have to consider tax planning when they divorce. Another issue to remember is that spousal support (alimony) is taxable to the payee and tax deductible to the payor. But the payments must pass certain tests to be considered alimony. Whether you want the payments to spousal support are characterized in another manner, such as property division, will depend on your particular divorce facts. Child support is not taxable or deductible.