In terms of dividing assets, one of the tax issues that most frequently comes up in Virginia is capital gains taxes. When selling the former marital home, for example, the court will make a ruling in terms of what portion of the proceeds will go to one spouse and what portion of the proceeds will go to the other spouse. Speaking with a skilled divorce lawyer can help parties better assess the valuation of their shared assets.
One of the things they may need to look at is a potential gain in the value of the property from the date it was purchased by the parties until the date it was sold. That gain is taxable income to the parties, and so it is important to address how the capital gains taxes will be divided between the parties when the property is sold and the proceeds are divided.
In Virginia, the tax implications associated with the increase or decrease in value of shared assets will be considered when dealing with capital gains. If the value has increased during the time that the parties have owned something, then there’s going to be a taxable event, and the parties have to figure out who takes what portion of that taxable event. Similarly, if the parties take a loss on an asset, there may be certain deductions the parties can take on their taxes.
Again, the loss would be divided between the parties, and the parties can do that, within certain parameters of the tax regulations, however they want. It may be that one person, based on what they earn as compared to the other, has the greater ability to make more of a deduction or pay less in terms of capital gains taxes. These are all things that the parties should consider.
The other issue has to do with the increase in value due to one spouse’s actions and if there is a separate property and a party can show that their actions during the marriage increased its value, then a claim can be made that there is a marital component to a separate property and the court should consider it a hybrid asset.
Capital gains tax issues also come into play when you are dividing things like stocks and other kinds of investments. Sale of any real property in Virginia or any investment type asset is going to implicate capital gains taxes. There are other tax-related issues that come up in the context of divorce but that really is the main tax issue in terms of property division.
Valuation in Virginia
When the Virginia court assigns a value to a business, there could be tax implications in terms of the basis that a party owns in that asset. For example, if a party starts a business, and puts a certain amount of money into it and the business has a certain value, the amount that is put in creates the tax basis for the person investing in it. That will determine, ultimately, if the business is sold and how much tax that person has to pay.
When the court assigns a value to the business, depending on exactly what the evidence and findings are, it could result in there being a judicial determination that the person has now increased their basis in the asset. This would ultimately increase the taxes that they would have to pay if that business is sold in the future.
Tax After a Divorce
It is possible, if an individual has a jointly titled property, that the court could assign that property to one spouse and the receiving spouse would need to look into what their basis is in that asset and that they are the 100% owner of it. In that way, there could be a tax implication of the court awarding a jointly titled marital asset to one person.
Once property has been divided between the parties and the divorce was completed, then each party may have their own tax basis and tax implications separately. Also, in terms of taxes and how they come in to play in divorce is, when parties divide retirement accounts, or the court divides retirement accounts in ruling a divorce case, the transfer of retirement of assets from one spouse to the other is protected from penalties and taxes because it is done in a divorce. There is a specific statutory exception for that kind of a transfer so that the parties do not have to pay penalties and taxes; 401-K or an IRA may be divided by the court.