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Helton Law Firm, PLLC

Tax implications of property division

In addition to child custody and alimony issues that need to be resolved during a divorce settlement, Tennessee couples whose marriages are ending should also pay attention to tax issues. For instance, it may be necessary to determine who claims a child on a tax return. Legal fees and property transfer taxes may also need to be considered in any settlement.

If a couple is splitting an appreciated asset, it could cause a tax headache. This is because the person receiving an asset may need to pay capital gains when it is later sold. For instance, the spouse receiving an asset that has appreciated $250,000 since its acquisition will have to pay taxes on the appreciated amount at a future sale. This is because of a change in the law that does not give the receiving spouse a step-up in basis.

Previously, the transfer of an appreciated asset would have the same treatment as if it had been sold. This means that the spouse transferring the asset would have to had paid the capital gains upon transfer. To get around this issue, the spouse who has to pay the tax may ask to be reimbursed or have the asset's value adjusted to account for taxes that will have to be paid in the future. Doing so could make it easier to come to a timely and amicable settlement.

In a divorce, complex property division issues may result in litigation or a protracted divorce settlement process. An attorney may help a client who is in such a dispute come to a resolution that meets his or her needs while also complying with state law. If a prenuptial agreement exists, it may spell out how property is divided assuming that it is a valid legal document.

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