Tax Implications of Asset Division in New Jersey
Most couples seeking or going through a divorce think more about the emotional and financial impact of the divorce than they do the tax issues. Yet, the tax implications of asset division in New Jersey divorce cases are just as real as those other issues. While you can get a portion of the marital assets after the court equitably distributes them, you may be shocked at the “sticker price” that you have to pay when you include taxes.
It is better to be prepared for this, even as you are fighting to keep a fair share of your marital property. If you need help with understanding the tax consequences of an asset division, our experienced New Jersey asset division lawyers at Moskowitz Law Group can provide legal guidance and explain how to proceed and connect you with the necessary tax professionals.
Understanding the Tax Consequences of an Asset Split During a Divorce
When a divorcing couple in New Jersey is dividing their assets, knowing how the federal government and state can tax those properties is an essential component of finding practical legal solutions. Here is what typical tax situations look like when dividing common marital assets.:
Transfer of Real Estate
This is not taxable if the property ownership changes from one spouse to the other without any monetary gain for either party. If the property is sold to another party for a profit, a capital gains tax usually applies. If there will likely be capital gains taxes, it is essential that a settlement agreement determines how those taxes will be allocated between the parties.
Investments and Business Interests
A direct trustee-to-trustee transfer of investments, such as stocks or bonds in a brokerage account, is tax-free. It is critical to properly define these transactions between divorcing spouses as a “transfer incident to divorce” and to specify how the transfer will occur to ensure it is tax-free. Conversely, there will be tax implications if one spouse’s stocks are liquidated to pay the other spouse money equivalent to the value of their share of the stocks. This usually comes in the form of capital gains taxes. If this is the case, the settlement agreement must specify how the capital gains taxes will be allocated between the parties. Likewise, a spouse who receives stocks from the other will likely pay capital gains tax if they liquidate those stocks at a much higher price in the future. Thus, both spouses need to know how much the stocks cost when they were acquired to plan accordingly.
Similar implications apply to dividing and selling business interests, such as equity in a business.
Retirement Assets
Federal law mandates that many retirement assets can be divided tax and penalty-free so long as they are divided using a Qualified Domestic Relations Order (QDRO) and that the Order provides for a transfer from one spouse’s retirement account into the other spouse’s retirement account. Similarly, individual retirement accounts (IRAs) can be divided via a transfer incident to divorce. Simply dividing a retirement by “cashing it out” can have serious tax implications and result in penalties. If a retirement asset absolutely must be divided by cashing it out, which is rare, a settlement agreement must account for how the taxes and penalties will be allocated between the spouses.
What Can You Do to Reduce Tax Consequences?
You can implement the following to minimize tax implications:
- For retirement assets, get a QDRO before the transfer.
- For business interests or equity, consider a properly timed valuation, long-term structured buyouts, asset swaps for business equity, or holding off on liquidating shares.
- For real estate, consider selling below the $250,000 profit threshold for single individuals or $500,000 for married couples. The IRS allows capital gains tax exemptions for up to those amounts, provided the spouse(s) used the property as a primary residence for at least two out of the last five years.
- For particularly complicated tax implications, ask your attorney to connect you with a qualified tax professional to help you plan
A New Jersey attorney can help clarify the options for you and structure your asset splits to minimize your tax burdens while consulting with a tax professional.
Contact a New Jersey Attorney About Tax Implications in Dividing Assets
Finding out that there are tax implications from dividing assets in New Jersey divorce cases can be overwhelming. With the skilled legal guidance of a lawyer from Moskowitz Law Group, you can navigate these issues. Contact us today to explore your legal options.
