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What should I know about taxes before I finalize my divorce?

On Behalf of | Oct 12, 2022 | Family Law

Those who are going through a divorce need to split all marital assets. This can require valuation of business interests and real estate as well as drafting specific paperwork to ensure the financial entity holding the retirement assets transfers the assets to the right recipient.

Once you account for all assets, you can move on and sign that dotted line to finalize the divorce … right?

Not quite.

It is also important to review any potential impact of federal and state taxes.

Is the sale of real estate resulting from divorce subject to tax?

In many cases the transfer of an asset to one party during the divorce process it is not subject to taxation, but there are situations that can lead to the Internal Revenue Service (IRS) or Washington state taxing authorities to claim tax laws apply. One example involves the sale of a home.

Although the transfer of property from joint ownership to one party as part of the divorce agreement is generally not taxed by Washington state or at the federal level, a later sale is different. This can happen if one party decides to take on the family home or other piece of real estate and sells it after finalizing the divorce. In this situation, the seller will likely need to pay the tax bill that comes with that transfer of property.

Similar issues can arise with any asset subject to capital gains tax. If the ultimate goal is to sell the asset for increased liquidity, it may be wise to consider selling before the divorce is finalized to either remove or share the tax burden.

Is there anything else I should know about taxes and divorce?

It is also important to discuss the following:

  • Filing status. This can be tricky during the year of the divorce. Some may choose to sill file jointly while others may file separately. In some cases, even those who file separately are still eligible for head of household status.
  • Dependents. If children are present, determine which parent can claim the child or children as a dependent on their tax returns.
  • Spousal support. Tax laws change, and recent updates changed how taxes impact spousal support. Make sure you have updated information when negotiating this part of the divorce.

Although this information can help guide a discussion, there is no right answer to these questions. Each situation is unique. As such, it is important to have these discussions with experienced counsel to better ensure you understand the agreement and reduce the risk of any surprises after the divorce is finalized.