Resolving Tax Issues in Property Settlements in Santa Barbara & Santa Maria
Are you searching for an attorney who knows how to minimize the tax consequences of your divorce?
Someone considering divorce may be unaware of the tax issues inherent in property settlement agreements in California. It is important to seek the advice of an attorney knowledgeable in divorce-related tax laws. Glenn L. Robertson has been counseling clients in family law matters in Santa Barbara and Ventura counties for over 20 years.
In community property divorces in California, property settlement agreements often trigger negative tax consequences. Not all divorce lawyers are knowledgeable in tax issues related to matrimonial law. Glenn L. Robertson structures property settlement agreements to minimize adverse tax consequences. If you have significant assets, Santa Barbara family law attorney Glenn L. Robertson is the right choice to help you navigate tax issues in divorce.
The good news: tax-free transfers
If an asset is classified as community vs. separate property, one spouse may transfer all or part of the asset to the other spouse as part of the property settlement agreement. In years past, a spouse who transferred non-capital-gains assets to a spouse as part of a property settlement agreement in California had to pay income tax on the difference between the basis of the asset and the fair market value (i.e., the "gain"). Fortunately, the IRS now allows divorcing couples to transfer most assets, including ordinary income assets, without incurring income or gift tax consequences. To qualify as a tax-free transfer, the transfer must occur:
- Before the divorce
- At the time of the divorce
- Within one year after the divorce
- Within six years after the divorce if the transfer is a consequence of a divorce or separation agreement
This does not mean there are no tax issues in the property settlement agreement for the acquiring party. When the asset is sold, the acquiring party must pay the capital gains on the profit.
The bad news: tax traps for the unwary
There are significant exceptions to the tax-free transfer rule. Anytime you divide a qualified retirement account like a 401(k), you should always include in the divorce decree language establishing a Qualified Domestic Relations Order (QDRO). This language serves several purposes:
- It establishes the spouse's right to share in the account's funds
- It allows the spouse to rollover the funds into her own IRA
- It shifts the tax burden to the spouse for withdrawal of the funds the spouse has received
Without this language, the person transferring the money gets hit with the taxes for withdrawing the funds and may pay a 10% penalty for withdrawing the funds before the age of 59.
If you are dividing an IRA or SEP account, you don't have to use the QDRO; but your divorce decree must require you to divide the account. If the decree requires it, you can simply roll over the spouse's portion of the IRA into the spouse's own IRA. However, if your decree fails to mention the IRA, the IRS will treat the transaction as if you received the money. You will have to pay the taxes on the withdrawal plus any penalties for early withdrawal.
Don't get burned by the IRS; plan your property settlement wisely
Contact Santa Barbara attorney Glenn L. Robertson online or at 805-963-3535 for more information about tax issues in divorce and property settlement agreements in California. Attorney Robertson offers weekend and evening appointments to Santa Maria, Lompoc, Summerland, Carpinteria, Ventura and the surrounding communities.