Capital Gains Implications of Family Law Settlements

Capital gains considerations can influence the benefit of a property settlement.

Although the Internal Revenue Code generally makes marital property divisions tax-free, this does not mean that a separating couple can ignore the tax consequences of their actions. Parties should consider capital gains implications in evaluating any potential settlement.

Capital Gains

A positive difference between what the parties paid for an asset (the tax basis) and what it sells for, creates a capital gain, which can generate tax liability. As such, the receiving party may not realize the full value of the asset if he has to divest part of it to the government.

Capital Losses

A negative difference between the sale price and tax basis creates a capital loss. A party can offset a capital loss against other capital gains to reduce overall tax liability. An asset that has depreciated, then, may be worth more than its assigned value if its liquidation will generate a shelter for a party's capital gains.

Tax Basis

In a marital property settlement, the receiving party takes the asset at the tax basis of the couple; that is, the basis equates to what the marital estate paid for it, not its value at the time of distribution.

References

• "10 Facts About Capital Gains and Losses"; IRS.gov; Retrieved September 28, 2010.
• "Capital Gain"; Investopedia.com; Retrieved September 28, 2010.
• "Capital Gains in Divorce Settlements"; Womansdivorce.com; Retrieved September 28, 2010.
• "Divorce and Home Sale Gains"; Bankrate.com; Retrieved September 28, 2010.