When Texans are going through divorces, they often focus on such big issues as child custody, spousal support and child support matters. While they are trying to negotiate an agreement regarding the property division in their cases, they may want to explore the potential tax complications that may arise after their divorces are final.
The law used to provide that when property was transferred from one spouse to the other in a divorce, the tax basis to the recipient was the fair market value on the date of transfer. Now, however, capital gains laws provide that transfers that are incident to divorces have a carryover basis, meaning that it will be the cost to the original owner that is determinative.
This means that if one spouse agrees to waive spousal support rights in exchange for receiving a specific asset, the recipient may face a large capital gains tax when it is eventually sold. For example, if stock was purchased by one spouse for $30,000 and is worth $200,000 at the time of the divorce, a spouse who takes it in exchange for giving up support rights will face capital gains taxes on the amount of the increased value at a subsequent sale. To avoid this problem, a spouse may want to insist on a provision in a settlement agreement that takes the future tax liability into account.
Being careful with even simple property division in a divorce may prevent later financial problems and tax liabilities. People may want to get help from a family law attorney, as doing so may help them be more aware of the potential tax issues a proposed settlement agreement may bring. A lawyer may be able to negotiate the inclusion of provisions that help a client avoid such problems.