tax implications of a home transfer during a divorce

Tax Implications of Property Transfers During an Auburn Divorce

/by

One of the most important aspects of an Auburn, Alabama divorce is the division or transfer of property. The law states that any asset that you or your spouse acquired during the course of your marriage is to be considered marital property (with a few exceptions), and this property is to be divided in an equitable manner.

Section 1041 of the Internal Revenue Code states that transfer of property between spouses or former spouses shall not be taxed under most circumstances, as long as the following conditions are met.

  • The transfer is related to the divorce
  • The transfer takes place within a period of one year from the date on which the divorce was finalized

Still, if you are not careful, the division or transfer of property during the divorce can trigger a tax event, as a result of which you might have to pay taxes unnecessarily. In this article, we will take a close look at three tax issues you need to be aware of during an Auburn, AL divorce.

Sale of the Marital Home

When it comes to dividing the marital home in Auburn, you generally have three options:

  • You can sell it and divide the proceeds equally between yourselves.
  • You can buy out your ex-spouse’s interest in the property.
  • You and your ex-spouse can continue to co-own the home and decide who gets to live in it.

In the first option, you are allowed to exclude up to $250,000 from your taxable income (if you are filing separately) or up to $500,000 (if you and your spouse are filing jointly).

It should be noted that in order to become eligible for the aforementioned exclusion, you and your ex-spouse must have lived in the home for at least two years in the previous five years.

In the second option, your ex-spouse – who is selling their interest in the marital home – is not required to pay any taxes. If you decide to sell the home after living in it for two years, you can deduct up to $250,000 from your taxable income. On the other hand, if you decide to sell the home within two years, you will have to pay taxes on the proceeds.

In the third option, if your ex-spouse chooses to live in the home and you choose to move out, and if your ex-spouse decides to sell the home later, you will not be eligible for the $250,000 exclusion rule, as a result of which you will have to pay taxes on your share of the proceeds.

To avoid this problem, you can consult an experienced Auburn, AL divorce attorney and create an agreement which clearly states that the co-ownership arrangement is done in accordance with your divorce settlement and that the sale of the home – if and when it happens – will be incident to your divorce.

Retirement Accounts

If the court in Auburn, AL orders that your ex-spouse is eligible to receive a portion of your retirement benefits, you need to get a qualified domestic relations order (QDRO) from the court to make sure the transfer of funds does not attract taxes.

If you simply choose to withdraw funds from your retirement account and hand it over to your spouse or if you try to transfer the funds without getting a QDRO, it can trigger a tax event.

Investments

Investments in the stock market are subject to short-term capital gains taxes if they are sold within a year after the investment was made and subject to long-term capital gains taxes if they are sold after one year. However, the tax laws in this regard may change from time to time.

If you decide to transfer stock options to your ex-spouse or sell the shares you own and divide the proceeds between yourselves, you might end up paying a substantial amount of taxes – depending on whether the stock options are statutory or non-statutory and a number of other factors.

How an Experienced Auburn, AL Divorce Attorney Can Help You

The tax issues related to divorce in Auburn can be complicated for you to understand. So, it is important to be represented by a skilled family law attorney who guide you properly and help you make the right decisions that can reduce your tax liability to the extent possible.

The family law attorneys at Alsobrook Law Group have decades of combined experience in handling divorce cases and have a deep understanding of the issues related to divorce in Auburn, Alabama.

We regularly collaborate with certified public accountants, financial advisors, and tax consultants and we can make sure you get the best advice on how to reduce your tax liabilities during and after the divorce. To discuss your divorce case and issues related to it, call us today at 334-737-3718 or contact us online and schedule a free consultation.