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Tax responsibilities for property transfers in divorce

Divorcing spouses in Pennsylvania often must deal with several complex financial matters when they negotiate a settlement agreement, including property division. Some might need to carefully consider the tax responsibilities that apply to their property settlements before it is too late to make changes.

It is common for spouses to negotiate a property settlement in which Spouse A transfers assets to Spouse B to obtain Spouse B's release of support rights. Tax law excuses Spouse A from claiming a loss or gain on assets that are transferred during a divorce. This rule also applies if Spouse A transfers assets to Spouse B for cash or other property or for the assumption of some responsibilities or other considerations of Spouse B.

For example, say that Spouse A transfers appreciated property to Spouse B. Spouse A purchased the asset for $50,000 years ago, but it is worth $300,000 at the time of transfer. Under current tax laws, Spouse A does not have to report the $250,000 long-term capital gain. Instead, Spouse B takes over the $50,000 tax basis. If Spouse B decides to later sell it for $300,000, that spouse must report the $250,000 capital gain and pay taxes on it.

There could be an overstatement on the value of the appreciated property that does not reflect the taxes that Spouse B could incur for the appreciation. If so, the spouse may seek to include a provision in the divorce settlement that requires Spouse A to provide reimbursement for the tax responsibility that results from the disposal of the property. Otherwise, Spouse B may negotiate an agreement that assigns the amount of projected proceeds after taxes as the property value.

Divorce and tax laws are complex on their own, so the rules become even harder to navigate when the two laws intersect. Estranged spouses who are unfamiliar with these laws and their impact could seek help from their respective attorneys in navigating the settlement process.

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