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The tax consequences of property division in divorce

When California married couples decide to divorce, matters such as spousal support, asset division, and child support and custody are the main issues that they have to resolve. However, some of them overlook the impact that some of their decisions will have on their tax situations in the near and far futures. The division of property is a matter that could have a significant and lasting effect on tax liability.

The first fact that spouses need to understand is that the transfer of assets in a divorce is not a sale or income for either party that can be taxed. As long as the spouses show that the transfer is the result of divorce, they can transfer cash and property between each other tax free. There is also no gift tax as long as both of the spouses are U.S. citizens.

Other elements of their marital estate, however, may not be transferred tax free. Dividing artwork, mutual funds, bonds or stocks could make the spouses subject to large tax bills on the capital gains. When spouse A buys stock from spouse B, for example, the cost of the stock has likely increased since it was originally purchased. This means that spouse A will be taxed on the difference in value from the original purchase and the time it was sold. Spouse B, however, is not taxed on the sale of the stock.

Even if the spouses do not incur immediate tax consequences, taxes could be applied later. They need to consider the tax basis of their property: High basis property is better than low basis property. If both spouses mix the high and low bases, they each share some of the tax burden. However, if one of them takes appreciated property and later sells it, that spouse will be responsible for taxes on the gains.

It might not be clear to some spouses as to which property and assets will benefit them the most in a divorce settlement. They could hire accountants and high-asset lawyers to help them along way.

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