A Guide to Paying Taxes on Non-Capital-Gain Assets in a Divorce

After years of battling and mixed emotions, you have finally agreed to end your marriage. You and your spouse have made a list of what you think is a fair division of property, but you’re not sure that your numbers are correct. Items like cars and houses are usually easier to assign value to than stocks you purchased early in the marriage. Should you cash them out? Should one of you keep them? And no matter what happens, how much tax will you owe afterward?

Divorcing Couples May Not Need to Pay Taxes on Stocks and Other Non-Capital-Gain Assets

The Internal Revenue Service (IRS) has a tax-free transfer rule that allows couples to transfer their stocks without paying tax. This rule applies only to assets that are not subject to capital gain; in other words, property that you divide and keep rather than sell—such as cash, cars, and furniture. For example, you do not have to pay taxes if you are:

• Keeping stocks. If there are already stocks in your name that you plan to keep as part of your property settlement, you will not have to pay taxes to do so. In addition, you will not have to pay any taxes if your ex removes his or her name to them (to give you sole ownership of future profits or losses).
• Transferring stocks. You may wish to give your spouse all—or a portion of—the stocks that are held in your name. Under the tax-free transfer rule, there will not be any taxes applied when the shares are transferred to his or her account. However, your spouse will have to agree to take over the future tax liability of the stocks, so that when the shares are eventually sold, he or she will have to pay the capital gains taxes.

In order to meet the tax exemption for transferring stocks due to divorce, you must make the necessary transfers within a reasonable amount of time. In most cases, this means that you will either have to have completed the transfer when your divorce is finalized or within one year after the date of your divorce or separation agreement.

Due to the amount of taxes to be paid and the uncertainty of the market, many financial advisors believe that stock options are less valuable than an equal amount of cash or other assets. To find out which property could end up being more of a hindrance than a benefit in the future, download a FREE copy our book, The Savvy Woman’s Guide to Divorce in Washington.