You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

Tax-free transfers can occur before a divorce or when it becomes final. This treatment also applies to post-divorce transfers if they’re made “incident to divorce.” This means transfers that occur within 1) a year after the date the marriage ends, or 2) six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement. 

Eventually, there will be tax implications for assets received tax-free in a divorce. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain (and pay the related built-in tax liability) when it’s sold, unless an exception applies. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. So, you should take taxes into account when negotiating your divorce agreement.

The beneficial tax-free transfer rule extends to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse, they can also be transferred tax-free. When the asset is sold, converted to cash or exercised (in the case of non-qualified stock options), the person who owns the asset must recognize the income and pay the tax liability.

TheKFORDgroup litigation team holds extensive knowledge and experience in expert witness engagements, forensic accounting, and business valuations.  Our experts are trained and experienced in the litigation process.  We understand and are experienced in the tax consequences of dividing assets during divorce.    Contact us to assist you and your client when you need a valuation expert that is objective and reliable. For more information, please call us at 210-340-8351.

Additional information included in this report was provided by PDI Global / Thomson Reuters © 2024