Property division becomes a crucial part of the California divorce process as each spouse is legally entitled to their fair share. However, before getting caught up in who gets the house and the 401(k), you can benefit from considering the tax implications of your settlement.
According to Kiplinger, using strategies that reduce taxes can minimize the financial impact that results when assets change hands. This is particularly true if your split includes real estate or a closely-held business.
Property transfers during the divorce process seldom cause capital gains or losses immediately. However, if the spouse who gets the home decides to sell later and the property value increases, the seller may owe capital gains taxes. Special tax rules may apply to help minimize the amount due as you may exclude up to $250,000 in capital gains if you meet the requirements.
Some retirement accounts require a Qualified Domestic Relations Order while others do not. Regardless of whether it’s an IRA, Roth or 401(k), it may be subject to unique requirements and tax considerations. If the account has significant assets, careful planning can protect your interests. You may determine that transferring it to another retirement account can offer the best option. Taking an ill-timed distribution could cost you thousands of dollars in penalties.
Establishing the value of a family business or closely-held corporation can determine its worth, which can help you decide whether maintaining joint interest or buying out your partner can offer the most benefit. In some cases, selling the business interests and dividing the proceeds may be the best alternative.
Understanding the tax implications of your divorce before you finalize the settlement can help you avoid costly decisions and save you headaches and thousands of dollars in the future.