Do I have to Pay Taxes on Property I am Awarded in My Divorce?

Under the Internal Revenue Code, a transfer of marital property to the spouses incident to divorce is not a taxable event.  The tax basis in the property remains the same and the transfer is treated, for tax purposes, as a gift.

Nonetheless, the issue of taxes is more complex and arises not only in the property division realm, but also with regard to dependency exemption and family support issues, tax credit issues, retirement matters, as well as issues related to unpaid tax liabilities and penalties, including the innocent spouse rule. 

Even in the area of property division, although the transfer event itself is not taxable, taxes can and should play a role in the valuation and disposition of assets which include a likely tax obligation.  Minnesota courts have held that it is not an abuse of discretion for a judge to consider the tax ramifications of a property award in determining what award of the marital estate is equitable.  If an immediate or near-immediate sale of an asset is anticipated and such sale will result in tax consequences, the Court should hear testimony from expert witnesses about the nature of the tax obligation and then give due consideration to the tax consequences in valuing the marital property.

Taxes and tax planning are an important consideration in any high net worth Minnesota divorce as well as divorces where complex valuation, property and income issues are involved. 

Appropriate tax and accounting advice can be very helpful and well worth the cost in many cases.

Andrew M. Tatge is a business and family law attorney with Gislason & Hunter LLP (www.gislason.com) and can be reached at atatge@gislason.com or (507) 387-1115. This information is general in nature and should not be construed as tax or legal advice.