Tax Implications of Property Transfers During a Divorce

The decisions you make in a divorce can affect you for years to come. This is particularly true if your divorce involves the transfer of high-value assets, since these transfers could impact you on your taxes. However, unless you discuss your case with a divorce attorney and financial planner, it’s impossible to know which decisions will protect you financially.

Ready to take the first step and discuss your divorce with an attorney? The team at Kirk Drennan Law is here to help. Call us at 205-803-3500 to schedule a consultation now.

Transfers During Divorce

Per the IRS, spouses and ex-spouses can transfer property to each other as part of a divorcee agreement without having to recognize gains or losses on the transaction. This allows the parties to divide property fairly without having to take a hit on their taxes the following year.

Property transfers that happen between the date of the divorce decree and the one-year anniversary of the divorce decree are assumed to be related to the divorce. After the year mark and up until six years after the divorce decree, property transfers can still be considered divorce-related if they are listed in the divorce decree. Once you pass the six-year anniversary of the divorce decree, property transfers are no longer assumed to be related to the divorce in any way.

Transfer as a True Sale

There are some situations in which it is more beneficial to treat a transfer as a true sale instead of a divorce-related transfer. This depends largely on the value of the property, how long the person receiving the property plans on holding it, and the realized gains on the property. This may be relevant for some high-asset divorces, so it is worth discussing with your attorney and financial planner.

When Property Transfer is Noted in a Prenuptial Agreement

You have to cover your bases when negotiating a divorce. Consider the terms of tax-free transfers during divorce as described above. If a transfer happens within one to six years after the divorce, it is considered divorce-related only if it is described in the divorce decree.

This may not always happen if property is described in a prenuptial agreement. If a specific division of assets is laid out in a prenuptial agreement, the divorcing partners may simply divide assets without listing it in the divorce decree. However, if this happens more than one year after the divorce decree, those transfers may not be considered divorce related. This may force one or both parties to suffer penalties on their taxes for those transfers. Outlining the transferred property in the divorce decree, even if it is listed in the prenuptial agreement already, may help avoid this issue.

Tax Concerns of Transferred Property

Even if you don’t need financial planning help for the divorce itself, you may find it helpful to consult with one as you plan for post-divorce life. Depending on which assets are transferred, you may need to change your tax exemptions and payments to accommodate your new financial status. For example, if you receive a rental property as part of your divorce agreement, you will need to consider the tax implications of being a landlord. If you meet with a financial planner early in the process, you’ll know how to manage your funds appropriately and take care of your new assets.

How a Divorce Attorney Can Help

Regardless of which assets are being transferred, you absolutely need to discuss your options with a divorce attorney. If your ex-partner is represented by an attorney and you are not, you’ll likely end up being taken advantage of. Unfortunately, you won’t know until taxes come due the following year. When you work with an experienced divorce attorney, you can feel confident that your lawyer has your best interests in mind. This allows you to begin the healing process during this challenging time.

Discuss Your Legal Issues with Kirk Drennan Law

As you get ready to work through the divorce process, remember that you don’t have to do it alone—and you shouldn’t. There’s a lot at stake in a divorce, and with proper legal assistance, you can best prepare for your fresh new start. To find out how Kirk Drennan Law can help, schedule a consultation now by calling us at 205-803-3500 or contacting our team online.