The Tax Consequences of Asset Division

Florida residents going through a divorce tend to be very concerned about the costs of
asset division and how much of their property they will be able to keep. What many people do not talk about, however, are the tax consequences of asset division during a Florida breakup. Every state has its own rules and guidelines on this topic, so it is important that one becomes familiar with the applicable laws to predict how they will apply.

Florida, for example, is not a community property state. In other words, the law does not require that marital property be divided 50/50. Instead, Florida law follows the standard of equitable distribution in which the divorce court will decide what is fair in terms of asset division. So long as both sides agree, Florida divorce courts will generally approve an asset division agreement arrived at by the couple themselves, even if it does not involve a 50/50 distribution.

When it comes to the transfer of assets, tax consequences may come into play. Most asset transfers in a divorce are classified as tax-free under the Internal Revenue Code, Section 1041. When the ownership of such assets is transferred, no tax penalties will apply. However, if the assets were an investment that was liquidated prior to the transfer, then the receiving spouse typically must pay taxes on any income that is reported from the sale.

On the other hand, if unsold and profitable stock investments are transferred, the party receiving them will normally not be liable for paying taxes on them until after those shares are sold. At that time, he or she will likely be responsible for any income tax that may apply to those shares. Finally, couples should be careful when it comes to transferring some or all of their Individual Retirement Account balances. If not done properly, one may be required to pay taxes on funds that are transferred to the other party to the divorce.

At the end of the day, it clearly pays to familiarize oneself with Florida laws and/or the laws of one’s state to determine the potential tax consequences that apply to asset division. By completing the asset division process wisely and strategically, couples can sidestep potential pitfalls and tax liabilities. They can also prepare mentally and emotionally in advance of the day that unavoidable tax penalties must be paid.