If you are a business owner in Washington in the midst of a divorce, you’ll have new tax implications once you and your spouse have signed the papers terminating your marriage. Here are some points you need to consider while negotiating your divorce terms.
Tax-free transfer rules
Most divisions of property in a high-asset divorce, such as business ownership interests, cash, and even the transfer of some real estate, can be divided between you and your ex-spouse without income or gift tax consequences. The spouse who receives the assets takes over its existing tax basis and holding period when applicable.
Most tax-free transfers occur before the divorce or when it becomes final. However, under certain circumstances, you can accomplish a post-divorce, tax-free transfer that occurs within six years if the transfers are made according to the terms of your divorce agreement.
Other tax implications include owning assets that increase in value after the divorce will be responsible for the taxable gain when the fair market value exceeds the tax basis. Be careful with assets that have a built-in liability. Note that the tax-free transfer rule also applies to ordinary income assets, making the owner responsible for the income and tax liability.
Planning is crucial for smart asset division
Divorce is a complicated, major life event. When you and your spouse have amassed considerable wealth during your marriage, property division can be one of the most difficult aspects.
Properly setting up your divorce agreement takes time. Most business owners with considerable assets, including real estate and various types of retirement accounts, should take the time to learn what future tax implications will be before making final decisions. By doing so, you can avoid unpleasant financial surprises in the future.