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The current and future tax implications of a divorce

Texas is one of nine states in the country that is designated as a community property state for divorce purposes. This means that when a Houston couple goes through a divorce, all joint assets and liabilities are expected to be divided equally. The need to be cautious about the full financial scope of any divorce, including a high-asset divorce, is important.

The complexity of property division and related divorce legal issues was the subject of a recent news article that discussed potential tax pitfalls of such distributions. The laws regarding how to split and transfer funds or ownership of any retirement or pension accounts are especially laden with rules that must be clearly followed if couples are going to be able to avoid serious tax penalties when facing the end of a marriage.

Most other forms of assets can now be transferred as part of a divorce with no tax consequence at the time that the transfer takes place. This is thanks to the IRS Code Section 1041. However, that does not mean that there will be no eventual tax implication to such a plan. For example, if one spouse assumes the ownership of the couple’s vacation home, he or she will pay no additional taxes at the time but will be solely liable for any capital gains tax that may be applicable if the asset is eventually sold with a higher value.

Couples facing a divorce should recognize that assets that have or may appreciate can ultimately be worth less than depreciated assets or cash. If you are facing divorce, you may consider a consultation with an attorney to discuss issues such as these to protect your current and future interests.

Source: The Wall Street Journal, “What’s even worse than divorce? The taxes,” Bill Bischoff, December 3, 2013

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