• 30
  • July
    2010

Two of the most important issues in any divorce are property division and asset protection. You and your former spouse have worked hard to accumulate a variety of assets over the years (homes, cars, bank accounts, retirement accounts) and it is only natural that you should receive a fair share of what is rightfully yours.

Unfortunately, many divorcing couples are not in the proper frame of mind when it comes to property division/asset protection. They may be so emotionally traumatized by the divorce process that they make financially imprudent decisions based on sadness, a desire to be finished with the ordeal, or worse, spite.

However, if a couple is willing to work together or at the very least consult with a professional, they can avoid making some potentially costly mistakes.

The following are two important issues where it pays for divorcing couples to put aside their feelings and carefully consider their options.

Transfers of Property

Under the Internal Revenue Code, most property transfers made "incident to divorce" are not considered taxable income for either spouse. However, it is still very important for a spouse receiving any such property transfer to carefully consider both the fair market value of the property as well as its after-tax value.
 
For example, if a spouse who will need financial assistance to start her new life is given a choice between $70,000 cash, or a $70,000 IRA, the better choice may be the $70,000 cash. Why? The cash would give her the funds she needs now and not present any future tax liability. The IRA on the other hand would be subject to serious tax penalties for early withdraw and therefore not supply the maximum amount of funds needed.

Sale of the Home

Under the Internal Revenue Code, if a married couple sells a home that they have both owned and used as their primary residence for at least two of the last five years, the first $500,000 of gain is considered tax-free (if filing jointly). The amount of gain considered tax-free goes down to $250,000 for a single taxpayer (i.e., the spouse who receives the house).

Therefore, if a couple is planning on selling the marital home at a gain of more than $250,000, it may be advantageous for them to postpone their divorce in order to file a joint tax return.

If you have questions or concerns about asset protection or property division, be certain to speak with an experienced legal or financial professional.

Related Resources:
  
• Think Through Division of Assets in Divorce (The Southwest Times Record)