Issues of divorce may prove tricky in terms of the tax implications, particularly where there is a division of property. Although the process of divorce is a civil procedure, the Internal Revenue Service (IRS) also has its own way of how the transfer of property should be taxed. Consulting a Tax Lawyer Sacramento, CA can help couples better understand these complexities and avoid costly mistakes. This is an intensive examination of some of the frequently asked questions by couples who are getting a divorce and would like to watch out for taxes out of concern.
1.     Is property division in a divorce considered a taxable event by the IRS?
No, such transfer between spouses or former spouses as part of a divorce settlement was never characterized as a taxable event by the IRS. Section 1041 of IRC prescribes that the event of such a transfer is an act of gifts which do not have any direct effect of taxation.
2.     Who is responsible for capital gains tax if the property is sold later?
The new wife or husband is subjected to the initial cost of such property. That is, assuming the property has increased in value and that the property is later sold, then the tax liability towards capital gains will be charged on the spouse to whom the property has been transferred in the divorce.
3.     Are retirement accounts taxed differently during a divorce?
Yes. The usual way to divide qualified retirement, such as 401(k) or pension, is with a Qualified Domestic Relations Order (QDRO) that prohibits immediate taxation. Unless a QDRO is in place, the early withdrawal can be fully taxable, and it will be exposed to a 10% early withdrawal penalty.
4.     How is the marital home treated for tax purposes?
In case one spouse gets the home and sells it subsequently, then they are eligible to take the $250,000 capital gains exclusion ($500,000, in the event of remarriage and joint filing). But when the house is sold as part of the divorce, then this is usually taxed depending on when it was sold, along with filing status.
1.     What happens to jointly owned investment properties?
In a case where investment property has been transferred during the divorce, the cost basis shall be similar to that of a personal residence. However, when the property is sold, taxes on capital gains could be incurred depending on the increase in its value. There is also a possibility of a depreciation recapture in the case of rented property, which makes consulting a tax attorney Sherman Oaks highly advisable for proper guidance.
2.     Are cash settlements or lump-sum payments taxed?
In most cases, the division of property payment in cash is not charged on both sides. Nonetheless, alimony (divorce contracts before 2019) can be charged to the recipient and be deductible to the payer. Alimony payments after the year 2018 will not be bound by tax because of the Tax Cuts and Jobs Act changes.
3.     Does the IRS require documentation of property division?
Yes. During the property transfer, vital documentation of records should be taken to include a court order, a continuous agreement, and reports of appraisal of the property. This information can be checked by the IRS to ascertain that the transfers satisfy the Section 1041 requirements on non-taxability.
