What To Know About Taxes In A Divorce Or Separation

Divorce is not an easy time for most couples and their families. However, a question whose answer is easy to respond to is the tax implications of a legal separation or a divorce. It has been observed quite often that there are several people who end up paying an exorbitant amount as tax after their divorce. It happens as they are not familiar with the implications in the beginning. After all, a family goes through a crucial transition and hardly enjoys paying a big sum in taxes due to a breakdown in the relationship. Thus, it makes sense for the affected couples to spend some time to think carefully about tax. It will really be an excellent investment for them.

What is the most crucial thing one needs to be familiar with tax on separation or divorce?

As long as a couple lives together and are married, they can transfer assets to each other without altering the CGT or capital gains tax.

However, there are many people who do not realize:

The tax benefit associated with a marriage ceases to exist when the tax year ends just after a permanent legal separation and even before a divorce is effective. Hence, when a couple separates say on January 1st but decides that they want to split after 6 months, they can no longer enjoy the benefit of transferring assets with one another free of tax.

What is the remedial action(s)?

From the tax perspective, it is better to legally separate by the first week of April. Such a decision will give a period of an entire year to the said couple for planning issues related to asset transfer between one another.

Though it may not be a practical action to take for many couples, they may invest some time thinking about it. The harsh reality is by the time most people start thinking about issues related to tax planning when they are getting divorced; they may not enjoy the exemption on Capital Gains Tax.

Family Home

It will be eligible for being exempted from capital gains tax while transferring. However, it has to be the primary residence of the couple throughout the ownership period. The couple can enjoy a relief from capital gains tax when such houses are sold, which have been their main home. Sometimes, there may be some relief even if the said family house is not the main residence during the time a couple was married. In such scenarios, there could be an extension of relief period.

Certain businesses may be granted exemption from CGT:

1. Some shares in trading companies that are unquoted
2. Interests in trading partnership
3. Sole proprietorship

However, the tax implications of a divorce or a legal separation may vary from state to state. Consult a good Orange County divorce attorney to get help and expert guidance when you are about to separate or divorce from your spouse.

Getting divorced in California can be complicated!  Download our free eBook, 18 Important Things to Know About California Divorce to educate yourself on the process.  

Gerald A. Maggio is an experienced Orange County divorce and family law lawyer and family law attorney located in Irvine, California, serving the Orange County and Riverside areas. Mr. Maggio assists clients with legal issues including divorce, legal separation, divorce mediation, child custody, prenuptial agreements, stepparent adoptions, and other family law issues. Mr. Maggio has practiced law in California since 1999, and founded The Maggio Law Firm in 2005, focusing exclusively on divorce and family law matters.