A Brief Examination of Two Critical Property Division Issues

When a couple decides to divorce, there are many issues that must be resolved. The issues that typically come to mind for most people are child custody, child support, property division and spousal maintenance.

While this is certainly accurate, it is also important to know that each of the issues can usually be further subdivided into more complex legal issues.

Today’s post will briefly explore two very critical property division┬áissues that typically arise in the context of divorce.

Selling the Home

Under Section 121 of the Internal Revenue Code, if a married couple sells the home that they have both owned and used as their primary residence for two of the last five years, the first $500,000 of profit gained from a sale is not considered gross income (i.e., not taxable).

However, this amount falls to $250,000 for a single taxpayer (i.e., a spouse who receives a home in a divorce).

Therefore, if you and your spouse are divorcing and planning to sell the home you once shared, it may be beneficial to delay a divorce (and file taxes jointly) if you anticipate a sale of the home will net a profit of more than $250,000.

Transfers of Property

Under Section 1041 of the Internal Revenue Code, the bulk of property transfers made “incident to divorce” are not viewed as either taxable income for the transferee spouse (i.e., the spouse receiving any property transfer) or the transferor spouse (i.e., the spouse transferring any property).

Nevertheless, it is very important for the transferee spouse to consider not just the current fair market value of the property but its after-tax value when dividing property.

For example, if a spouse is given the option of $60,000 cash, or a mutual fund with a basis (i.e., original price) of $60,000, the better choice may actually be the $60,000 cash.

Why?

The $60,000 cash would most likely not create any future tax liability. On the contrary, the mutual fund would eventually be subject to capital gains tax (i.e., the sales proceeds minus the basis of $60,000).

To learn more about divorce and property division, contact an experienced and skilled legal professional.

This post is for informational purposes only and is not to be construed as legal advice.

Stay tuned for more from our Ft. Worth family law blog …

Related Resources: Think Through Division of Assets in Divorce (The Southwest Times Record)