When Minnesota couples divorce, the property division process can involve some significant asset transfers. Fortunately, for the most part, these transfers are free from income tax liability. But when divorce forces a couple to divide investment assets, the possibility of capital gains tax liability is raised.
The IRS takes the position that as long as divorce is the reason for an asset transfer between spouses, the transfer is not taxable. However, when assets have appreciated in value, the increase may be subject to capital gains tax when the asset is ultimately sold. The increase in value is measured by the difference between the basis – what you paid for the asset originally – and what you sell it for.
In the context of divorce, the important thing to remember is that when assets are transferred from one spouse to the other, the original basis is transferred with them. Thus, if a spouse receives stock from the other spouse as part of a property settlement, the basis is the amount the couple – or other spouse – originally paid for the stock. For example, if Spouse A buys some stock for $25,000 and then transfers that stock to Spouse B when they divorce ten years later, the basis for the stock remains $25,000. Spouse A pays no tax on the transfer because it was made for purposes of the divorce. But if Spouse B later sells the stock for $30,000, Spouse B will have to pay capital gains tax on the $5,000 increase.
It is important to keep the basis of an asset in mind when valuing it for property division purposes. A bank account with a balance of $50,000 is worth more than a stock portfolio worth $50,000, because the stock in the portfolio will be subject to capital gains tax when it is sold.
A high asset divorce often involves complex property division issues. An attorney who understands the tax implications of asset transfers can help a spouse make more informed decisions.
Source: Kiplinger.com, “Tax Planning for Getting Divorced,” accessed Oct. 24, 2015
