The way that Capital Gains Tax in Divorce is handled may shock some, may be intuitive to others. The important thing to remember is to have a CDFA in the room or available to review your settlement when negotiating divorce because the Certified Divorce Financial Analyst can make sure you have all the information you need to make an educated decision when agreeing to a settlement that may affect you negatively in years to come.
Capital Gains Tax is a Tax that is imposed when an asset is sold. Most common assets that can have a capital gains tax assessed when sold are stocks, bonds, precious metals and property. Therefore if any of these are being split during the divorce, you need to understand the Capital Gains Tax impact you may have in the future. The Capital Gains Tax is determined using the Cost Basis, the original cost of the asset, and the selling price. The rate is then applied to this difference.
Let’s take a house for example that was purchased for $50,000 and is currently valued at $500,000. Even if the mortgage is $350,000, the cost basis is $50,000 and the selling price is estimated at $500,000. The Capital Gains Tax would be applied to $450,000 or the difference between $50,000 and $500,000. That is the profit when selling the house. The current Capital Gains Tax rate is currently between 10% to 28% based on income levels. Let’s use the 25% Capital Gains Tax rate for this example. For homes only, there is also a $250,000 tax exemption for individuals when fully eligible, so therefore if a married couple sells a house for $500,000 and they purchased the property for $50,000, they would pay no Capital Gains Tax because they met the criteria for eligibility and they both had a combined exemption of $500,000. However, if one spouse gives the property to the other spouse in a divorce and that spouse then sells the property in the future, that spouse would only get a $250,000 exemption and not $500,000. The cost basis remains at $50,000, even when transferring the asset ownership from one spouse to the next. The divorce asset transfer is not classified as a sale to the spouse.
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