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Divorce and Taxes: The Tax-Free Transfer Rule

by Norris Law Group on September 16, 2014

Divorce and Taxes: The Tax-Free Transfer RuleMarketWatch, a division of the Wall Street Journal, offers a series of five factors to consider regarding divorce and taxes. In our previous blog, we discussed how the state(s) in which you and your spouse reside and own property can affect your taxes and how your tax liabilities may be divided. In this edition, we take a look at how the federal “tax-free transfer rule” can apply to property division in a divorce.

Factor #2: The Tax-Free Transfer Rule

Based on to Section 1041 of the IRS Code, you and your ex-spouse can typically divide assets without any incurring gift taxes or federal income taxes at the time of the divorce.

It is usually possible to transfer property to a spouse without incurring any tax before the divorce is final. For example, if you receive the main family residence in a divorce, taxes won’t be assessed right away. But you will have to pay any property taxes on the home when they are due, unless the divorce agreement says otherwise. As another example, you can give your spouse stock as part of the divorce with no tax liability to yourself, but if the stock results in any capital gains, the spouse who received th stock will probably have to pay capital gains tax.

Tax-free transfers may also be made after a divorce is final as long as they are made “incident to divorce.” Transfers may meet this standard if they are made within one year after the date the marriage formally ends, or within six years after that date if the transfers are made within the stipulations of your divorce agreement.

Confused? A skilled divorce attorney can help you work through all the details. Adding a professional tax advisor or financial consultant to your “divorce team” may also be a good idea.

Attorney Graham Norris and his associates at the Norris Law Group serve the residents of Utah County, UT and throughout Utah, Wyoming and Idaho. Contact them today at 801-932-1238 or online for a free consultation.

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