One asset does not always equal another asset, even if the values are identical. One reason for this may be based on the personal situation of each spouse. For example, one spouse may have a greater need for cash in the short run, where the other spouse may place higher need on retirement assets. Personal preference or short-term and long-term financial needs may be only part of the equation. Tax consequences of a property division can impact the long-term financial future of divorcing spouses.
Deborah Nason with CNBC pointed out the not-so-obvious effects of a divorce property division in her article Not always a rose: Avoiding thorny asset-liquidation issues in divorce. For example, she points out, “if the wife keeps a house with $500,000 equity, this asset generally has a gain exclusion; if the husband keeps a 401(k) worth $500,000, he will sustain an unavoidable tax liability—one-third of it could go to taxes.” However, a judge will view these assets equally based solely on valuation at the time of the divorce.
But, keep in mind, liquidation is not the best answer either because liquidation creates a taxable event. Dividing assets between spouses during a divorce is generally not a taxable event. Nason’s article points out, “…because transferring assets between spouses is a nontaxable event, it becomes a great motivator to trade assets back and forth”.
Nason suggests the following Do’s and Don’ts in considering asset liquidation as part of a divorce:
Asset liquidation dos and dont’s
Do:
—Understand the cost basis of investable assets.
—Make sure you know the purchase price of a real estate asset and quantify all improvements made.
—Understand what the capital gain will look like for the sale of a home.
—Make sure to obtain good business valuation (on equipment, buildings/real estate, goodwill, customer lists, customer base, etc.).
—Get an appraisal for collectibles.
Don’t:
—Liquidate a 401(k) if at all possible.
—Sell something that will result in the biggest capital gain.
—Forget to be aware of the change in capital gain exclusion from $500,000 to $250,000 when the proceeds of a house sale are split.
—Sell an asset without getting a fair price.