Guest Post by John Ellsworth, Esq.
When a divorce settlement moves property (typically, your house and part of his or her 401-K) from one spouse to another, the recipient doesn’t pay tax on that transfer. That’s the good news.
But it’s important to remember that the property’s tax basis moves with the property. If you get the house, you also get its basis. This means that when you sell the property you get to subtract how much you “paid” for the property from the sale price. The “how much you paid for it” part is called the “basis.”
So, if you get property from your ex in the divorce and later sell it, you will pay capital gains tax on all the appreciation before as well as after the transfer. (“Appreciation” means how much it’s gone up in value.)
That’s why, when you’re splitting up property, you need to consider the tax basis as well as the value of the property. A $100,000 bank account is worth more to you than a $100,000 stock portfolio that has a basis of $50,000. There’s no tax on the former, but when you sell the stock, you will owe tax on the $50,000 profit.
If your divorce lawyer isn’t familiar with how this all works, ask him or her to consult for an hour with a qualified tax lawyer to get the low-down.