Don’t forget about the future when valuing assets in your present divorce

The decision to get a divorce is just the first step in the process. There are many decisions that have to be made once a couple decides to end their marriage. If the couple has children, parenting time, visitation, education and so much more must be considered. If the couple owns property of any kind including a house, a car, stocks, businesses and even season tickets are considered property subject to division.

Texas is considered a community property state which means that generally any property obtained during the marriage is split 50/50 in terms of ownership interest between spouses. During property division, the assets are valued and divided between the soon-to-be exes. When it comes to property valuation, the present fair market value is not the only factor that must be weighed.

Every piece of property whether real or not has a tax liability that carries with it. When an item is purchased or acquired it receives a basis value, and any increase in its worth is considered taxable gain. Although property transferred during or “incident to” divorce falls under the Tax-Free Transfer Rule has no federal tax liability, nothing in this world is ever truly tax free.

A couple must consider the future value and future tax liability that may follow with a piece of property. Remember that basis? It stays the same when the asset is transferred during a divorce, but once it is sold in the future by the spouse who received it during the divorce, tax on the gain becomes due. So while the stock may have had a fair market value of $50 a share, it is worth less after the future tax liability is considered.

Source: Smart Money, “What Divorce Means For Your Taxes,” Bill Bischoff, 8 June 2011