Divorce tip: Analyze the tax consequences of property division

On behalf of Bebout, Potere, Cox & Bennion, P.C. posted in divorce on Tuesday, November 22, 2016.

Property division is one area where our divorce clients often need particular guidance. There are several reasons for this.

Since Michigan is an equitable distribution state, assets in the marital estate need only to be divided fairly, rather than an even 50-50 split. That qualitative approach may open the door to disputes or confusion. Furthermore, the tax implications of divided property are commonly overlooked in negotiations, especially regarding securities or retirement assets.

For example, a property settlement proposal may look fair on paper, but if the assets are taxable, one party may actually be getting far less than the other. Whereas a family home might be transferred without tax, a retirement plan cannot be sold without triggering tax implications. Specifically, taxpayers generally get a $250,000 exclusion from the gain on the sale of a personal residence. Withdrawals from a tax-deductible retirement plan, in contrast, typically trigger ordinary income tax rates.

Our divorce law firm works closely with our clients, helping them to understand that different categories of assets must be analyzed differently. It can be helpful to split assets into categories, and then propose division of assets within each category. For example, real estate and retirement accounts are separate types of assets, so a different division might be applied in each category.

Of course, this calculation gets more complicated if one spouse wants to keep the family home, and the other spouse seeks taxable accounts as compensation. Although this may seem like comparing apples with oranges, an experienced family law firm can propose a valuation approach that will be equitable.

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