Your future happiness may depend on the choices you make throughout your divorce. Because of the potential tax implications, this is especially important if you want to transfer substantial assets as part of your divorce settlement. It is difficult to determine which choices would safeguard your financial interests throughout a divorce unless you consult with a divorce lawyer and financial advisor. Check out this website to know more.
Splitting Assets and Debts
The Internal Revenue Service rules that spouses and ex-spouses who transfer property to each other as part of a divorce agreement do not need to report any gains or losses on the transfer. All parties involved can divide their assets without fear of a tax bill the next year thanks to this arrangement.
Property transactions that take place between the divorce decree’s effective date and the first anniversary of that decree are presumed to be divorce-related. Property transfers stated in the divorce order can still be considered divorce-related after the one-year mark and for up to six years following the decree. After the six-year anniversary of the divorce decree, it is no longer assumed that any transfers of property were related to the divorce.
Conversion to a Legal Sale
It may be preferable to treat a transfer as a legitimate sale rather than a divorce-related transfer in some cases. This is heavily dependent on the property’s valuation, the recipient’s intended holding period, and any realised gains. This is something to address with your divorce lawyer and financial advisor if your marital assets are substantial.
When a Marital Asset Transfer Clause Is Included in a Prenuptial Agreement
When negotiating a divorce settlement, it’s important to prepare for all eventualities. Take into account the aforementioned conditions for obtaining a divorce without paying taxes. Within the first six years following the divorce, a transfer is only considered divorce-related if it is specifically mentioned in the decision.
Prenuptial agreements that detail property ownership may prevent this from happening. Divorcing spouses are not required to detail the division of property in the divorce decree if they have a prenuptial agreement outlining the terms of property distribution. To be clear, divorce-related transfers may not apply if they occur more than a year after the decision was issued. Because of this, one or both parties may incur tax penalties related to the transfers.