Imagine you're in the midst of the asset division process during your divorce. You want to keep the $1 million family home and your spouse wants to keep the $1 million investment portfolio. Both are worth the same amount of money so it should be a simple process of you keeping the house, and your spouse keeping the investment portfolio -- right?
Not necessarily. Capital gains taxes could apply to either the investment portfolio, the house, or, likely, both. You'll need to consider the amount of these tax liabilities when you're dividing your home.
How tax liabilities will affect your asset division process
Imagine for a second that you and your spouse bought your home for an initial purchase of $500,000. Meanwhile, in order to acquire the current $1 million investment portfolio, you and your spouse spent approximately $1.2 million. The home value is up and the investment portfolio is down. The investment portfolio has zero capital gains taxes associated with it. In fact, if your spouse liquidated the portfolio, he or she could actually keep all of the money and get a tax break from the losses.
Meanwhile, if you wanted to liquidate the home, you're going to get hit with some big tax liabilities on the $500,000 of income generated by the home's rise in value. As such, your $1 million home is actually worth much less to you than its value on paper.
As a final note, you also want to keep in mind just how liquid a piece of property is. Is it a $1 million house that's on stilts, painted purple and requires constant upkeep and care from handyman? Or, is it a $1 million house with a white picket fence and requires little upkeep and care? Clearly, one piece of property will be much easier to sell than the other. You'll want to keep these issues of liquidity in mind when divvying up property with your spouse.
Determine tax liabilities before you agree on asset division
Can you see how important it is to determine tax liabilities before you agree on asset division? Many spouses who own valuable assets bring in appraisers and tax specialists to estimate the market value of property and to estimate the potential tax liabilities associated with that property. Once tax liabilities are determined, and you fully understand your property division rights, you can establish the true liquidatable value of a particular piece of property.