If you’re planning to divorce and you and your spouse have significant assets, including businesses, real estate, stocks, art and other property, you should rightly be concerned about the tax implications of these assets as you determine which ones to seek. In addition to sound legal guidance, it’s wise to have your own tax and financial professionals (not those you’ve shared with your spouse during your marriage) advising you.
One thing you may be worried about is capital gains tax on anything your spouse transfers into your name that has increased in value significantly since they first bought it. Will you be stuck paying capital gains tax when you file your income tax return?
“Incident to the divorce”
The good news is that the Internal Revenue Service (IRS) doesn’t consider capital gain (or loss) on any transfers of property made between spouses as part of their divorce settlement (what the IRS refers to as “incident to the divorce”).
According to Section 1041 of the Internal Revenue Code, any transfers that former spouses make between one another within the first year following the signing of their divorce decree are exempt from capital gains tax. You may see them referred to as Section 1041 transfers. For transfers made during that period, you don’t even need to provide documentation that they were part of the divorce settlement.
What if you get an asset as part of your divorce, but the transfer couldn’t be finalized within the first year? Some pieces of real estate, for example, can be complicated to transfer. A share of a business can as well. As long as you can show that it’s part of your negotiated divorce settlement or was ordered by a court after the divorce, you are still free from having to pay capital gains tax (as long as the transfer is finalized within six years following the divorce).
You don’t have to be dividing millions of dollars worth of assets to want to make sure that you’re doing it in the most advantageous way possible. That means considering both the short-term and long-term costs and benefits of those assets. Having a team of professionals to help you make the best decisions can save you money and stress.
