Thursday, March 12, 2015

What are the tax ramifications of division of property in a divorce?

What are the tax ramifications of division of property in a divorce?

Getting a divorce is a very stressful and emotional time for everyone involved. One tax issue that I have come across recently in this area involves the division of business use property during a divorce.

Normally, when property is used for a business purpose (for instance, a home is used as a rental property) the owner is able to receive tax deductions each year to offset depreciation of the property.  These tax deductions reduce the basis of the property.  The basis is the amount you paid for the property minus any deductions (e.g., depreciation) you have taken during your ownership.  The basis will be used to determine the capital gain or loss claimed when the property is sold.  When you sell the property, the purchaser will have a new basis of the price they paid, which is the fair market value.  Your capital gain or loss will be determined by subtracting your basis from the fair market value.  If your basis is much lower than the fair market value you will have to pay tax on the difference in the form of capital gains.  If your basis is much higher than the fair market value then you will have capital losses.

If the property transfer occurs during divorce proceedings the parties can elect to treat the transfer as a gift and the recipient receives a carryover in basis (i.e., the former spouse’s basis).  While this election could be beneficial for some couples it could be burdensome for others.  It is important to consult with tax professionals to determine if you are eligible for the election and whether or not you should take advantage of it.  There are important ramifications for both sides of the deal.

Transfer of property and the tax ramifications of the transactions can be tricky so ensure that you request a complete evaluation from a tax professional before you make the transfer.

Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.