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Consider taxes when valuing property

On Behalf of | Sep 24, 2018 | Property Division

Thinking about taxes and how they will affect a divorce or separation is not just an exercise that the wealthiest residents of the Phoenix area should undertake. Indeed, as a previous post pointed out, any separated parents who have children, and, thus, the ability to take child-related tax benefits, need to think about this issue.

Likewise, while not everyone in the area is independently wealthy, many people do have important investments that, as much as possible, they would like to protect from taxation, even if they recognize that property division is an inevitable part of the separation process.

For example, a couple who owns more than one parcel of real estate will need to consider capital gains tax. At the federal level, the capital gains tax is a tax on the gains a person enjoys because of an investment, including an investment in real estate.

When transferring property in connection with a divorce, the spouse receiving the property does not need to pay capital gains tax at that time, which is a huge advantage. However, there is a catch in that the person who walks away with the extra rental property or mountain cottage will need to pay the tax if it is sold.

To illustrate how this works, if a couple buys a piece of property for $100,000 and it is worth $200,000 at the time of a divorce, then either spouse can, as part of their settlement, walk away with a $200,000 home without paying tax. However, if the spouse later goes and sells the house for $300,000, then they owe tax on a $200,000 gain.