A CPA recently wrote to TaxMama struggling with a problem. Her client got divorced and paid her ex-husband for half the value of the house he bought before they were married. Now this lady is selling the house. Doesn’t seem like much of a problem, does it?
Well, this was a house that the ex-husband had bought about 20 years ago. He had rolled over the profits from the sales of two previous homes, so the tax value (tax basis) of the house was much lower than his purchase price, reduced by the profits that were not taxed the first two times he had sold a home.
What’s the big deal? The ex-wife could just ask him for the figures, right? Remember, this involves a divorce—and divorces are not always friendly. As it happens, in this case, it was friendly—but the ex-husband had passed away, making him hard to interrogate.
This problem could have been avoided entirely in one of two ways.
As you can see, when going through a divorce, it’s very important for the two parties to do more than split the current value of assets evenly. It’s crucial to understand the underlying tax consequences of those assets as well.
Understanding assets and how they are taxed
What assets are apt to cost the recipient hidden taxes (or cause tax headaches) while appearing to generate an equal split?
Have your tax pro review all the assets being split during the divorce. Don’t let the pro just take a quick glance and shrug it off. Insist that he or she ask the right questions about the basis. Get all the documentation to prove the tax cost for your files. Know what you’re really getting—not just what you think you’re getting.
Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.
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