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Capital Gains Taxes and Divorce

 

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Did you know...?

 

 

 

The spouse who leaves the family home can still get a $250,000 exclusion from capital gains taxes.

 

 

Before the Tax Relief Act 1997 (TRA ’97), if one spouse left the house two years before the divorce was final, they lost their ability to roll forward their capital gain. In cases where there is significant capital gain in the family home, TRA ’97 allows both spouses to take a $250,000 exclusion even though only one spouse is awarded the house.

Our new exclusions allowed under TRA ’97 include,

- Single taxpayers can exclude $250,000 from capital gains
- Married filing jointly can exclude $500,000 from capital gains
- These exclusions are allowed for one sale every 2 years
- The selling spouse must have lived in the house at least 2 out of the last 5 years.
(Change in place of employment, health or unforeseen circumstances allow an exception)

Ownership test

If one spouse, pursuant to a divorce decree or separation agreement is required to grant the other spouse the right to temporary possession of the home, but retains title to the home, and the home is later sold, the non-occupying spouse will be treated as having owned the home for the period of time that the occupying spouse owned the home as principal residence.

Use Test

In the event one spouse transfers a residence to the other pursuant to a divorce decree, the “transferring spouse” shall be able to include the “receiving spouse’s” use period in computing their own use period.

NOTE:

If one or the other remarries prior to sale of home jointly owned with the former spouse, the remarried spouse can use the new spouse’s time in the home to meet residency requirements to use the “married filing jointly” exclusion amount.

Let’s look at an example:

John and Mary are getting divorced. Under the divorce decree, Mary is awarded the jointly owned family home for six years until their son graduates from high school. At the end of six years, Mary will sell the home and 50% of the proceeds will be sent to John.

Mary sells the home for $750,000. Mary and John will each receive $375,000. If the basis in the property was $100,000, Mary’s portion of the basis is $50,000 leaving her with $325,000 gain. Even though she uses her $250,000 exclusion, she will be taxed on $75,000 of gain.

 

 

 

Captital Gains

 

 

Before the Tax Relief Act 1997 (TRA ’97), if one spouse left the house two years before the divorce was final, they lost their ability to roll forward their capital gain. In cases where there is significant capital gain in the family home, TRA ’97 allows both spouses to take a $250,000 exclusion even though only one spouse is awarded the house.

Our new exclusions allowed under TRA ’97 include,

- Single taxpayers can exclude $250,000 from capital gains
- Married filing jointly can exclude $500,000 from capital gains
- These exclusions are allowed for one sale every 2 years
- The selling spouse must have lived in the house at least 2 out of the last 5 years.
(Change in place of employment, health or unforeseen circumstances allow an exception)

Ownership test

If one spouse, pursuant to a divorce decree or separation agreement is required to grant the other spouse the right to temporary possession of the home, but retains title to the home, and the home is later sold, the non-occupying spouse will be treated as having owned the home for the period of time that the occupying spouse owned the home as principal residence.

Use Test

In the event one spouse transfers a residence to the other pursuant to a divorce decree, the “transferring spouse” shall be able to include the “receiving spouse’s” use period in computing their own use period.

NOTE:

If one or the other remarries prior to sale of home jointly owned with the former spouse, the remarried spouse can use the new spouse’s time in the home to meet residency requirements to use the “married filing jointly” exclusion amount.

Let’s look at an example:

John and Mary are getting divorced. Under the divorce decree, Mary is awarded the jointly owned family home for six years until their son graduates from high school. At the end of six years, Mary will sell the home and 50% of the proceeds will be sent to John.

Mary sells the home for $750,000. Mary and John will each receive $375,000. If the basis in the property was $100,000, Mary’s portion of the basis is $50,000 leaving her with $325,000 gain. Even though she uses her $250,000 exclusion, she will be taxed on $75,000 of gain.

 

 

 

The Divorce Resource Center of Colorado is committed to changing the way our society divorces. We envision divorce to be a process that does not end with a Decree, but one that is a catalyst for change that leads to new beginnings. Our goal is to provide resources that will empower clients in each and every step of their journey through the difficult life transition of divorce and beyond. Join us for our Second Saturday series! CLICK HERE for more information!

 

 

 

 

 

 

Client Question: Access to Financial Information During Divorce

 

 

Client Question: Access to Financial Information During Divorce

 

If you’re contemplating getting a divorce and you’re feeling fearful and overwhelmed, you’re not alone. Aside from feeling uncertain about the future, there’s also the worry about your future financial situation as you divide one household into two, financially.

 

A very common question we’re asked at the Divorce Resource Centre of Colorado is this:

 

My husband handled and has access to our finances and all the banking and investment information. What should I do?

 

First, it’s advisable to order your credit report as it will list all your credit history. The credit reports do not have your entire account number shown. You should find and record each full account number which you will need as you implement your property division.

 

What DRCC Recommends

 

During a divorce, any assets or funds contained in a joint bank or investment account are generally considered marital property. These funds belong to both spouses, even though one person may have been responsible for the majority of the deposits and contributions. It is important that you don’t unilaterally remove funds from these accounts without professional guidance as you enter the divorce process. (SOURCE: Deb Johnson, ChFC, CDFA Divorce Resource Centre of Colorado.)

 

The first thing you need to do is gather all the financial information possible:

 

  • - Photocopy or take pictures of statements (both bank, investment and retirement accounts.
  • - Write down names of banks or investment firms AND account numbers.
  • - Photocopy or take pictures of tax returns (at least the most recent 3 years.
  • - It is helpful to copy any loan applications (HELOC, auto, business) as this gives us a benchmark of the family financial situation prior to the divorce.

 

This information will be used later to identify all your marital assets/liabilities, which will be used to create anequitable division between you and your spouse.

 

What if one of the spouses withdraws funds?

 

According to Avvo.com, “You can legally withdraw up to half of the money in a joint bank account before the divorce is filed. It is extremely important that this is done before the divorce is filed; otherwise you are violating the law.”

Even with this information from Avvo.com, it is most important to consult a professional before removing/transferring funds.

 

Let us help

As with all divorce matters, it’s important to consult with a professional who will help guide you through the process. If you’re looking for advice from several different professionals before you consider hiring someone, we recommend you attend a Second Saturday workshop hosted by Divorce Resource Denver. Meeting times are listed here.

 

The Divorce Resource Center of Colorado is committed to changing the way our society divorces. We envision divorce to be a process that does not end with a Decree, but one that is a catalyst for change that leads to new beginnings. Our goal is to provide resources that will empower clients in each and every step of their journey through the difficult life transition of divorce and beyond. Join us for our Second Saturday series! CLICK HERE for more information!

 

 

 

 

 

Converting Property Settlement Notes into Deductible Maintenance Payments

 

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Converting Property Settlement Notes into Deductible Maintenance Payments

 

 

 

Example 1: When Andy and Sheila got divorced, Andy owed Sheila an equalization payment of $200,000 which he could pay over time. If Andy paid $20,000 per year plus interest on the unpaid portion, it would be tax-free income to Sheila because it’s still a transfer of property. Andy earns $190,000 per year and Sheila doesn’t work. If Andy has no itemized deductions, the result would look like the following:

 

 

Converting Property Settlement

 

 

 

 

Example 2: Assume the same facts as in Example 1, except that Andy decides to call the payment maintenance and he pays $25,000 to Sheila and the payments qualify as maintenance. His net after taxes and the maintenance payment of $25,000 to Sheila is $128,601, which is $4,879 more than in Example 1. Sheila has no itemized deductions. Her tax liability for 2016 is $1,975 (tax on $16,000 as a single taxpayer). As shown below, her net after taxes is $23,400 which is $3,400more than in Example 1.

 

 

Converting Property Settlement 2

 

 

 


The Divorce Resource Center of Colorado is committed to changing the way our society divorces.We envision divorce to be a process that does not end with a Decree, but one that is a catalyst for change that leads to new beginnings. Our goal is to provide resources that will empower clients in each and every step of their journey through the difficult life transition of divorce and beyond. Join us for our Second Saturday series! CLICK HERE for more information!

 

 

 

 

 

 

 

 

Divorce and Families with Special Needs Children

 

 

 

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Divorce and Families with Special Needs Children

 

It is reported that the divorce rate among families with Special Needs Children lies somewhere between 73% and 93%. Unfortunately, even when one of the spouses has a disability, the divorce rate is higher than that of the general population.   Providing care and quality of life for these Special Needs Children comes with many, many challenges. The types of disabilities vary greatly, generally among these 4 types:

 

Developmental

Physical

Cognitive

Mental illness

 

And, it is not uncommon for a child (or adult) to experience more than one type of disability. It is interesting to note that previously 1 out of 250 people (including children) were diagnosed with Autism and now it is 1 out of 80!

 

Special Needs Planning Tips:

 

Be aware of the $2,000 asset limit Persons with disabilities CANNOT have more than a total of $2K (cash) in their name (checking and savings accounts, stocks, bonds, mutual funds, savings bonds, and permanent life insurance. They CAN have a home, car, and a prepaid funeral plan.

 

Be careful with the gifts received from ‘well-intentioned’ relatives. In order not to jeopardize any government benefits, all gifts should go into a properly drafted Special Needs Trust.

 

Be careful selecting a Guardian (those who provide care giving)-Trustee (the financial role). Perhaps one person could fill both roles-the question must be – Does this person have the skills to be able to care for and maintain a good quality of life for the child? Does this person have the financial knowledge to manage the finances of your child(ren) with special needs?

 

Craft a clear Letter of Intent - this will detail all the information future care givers will need to provide the person with disabilities the same quality of life you have worked so hard to create for your special needs child(ren).

 

You don’t have to do it alone – It is important that you surround yourself with the proper team of professionals to guide you through the complex maze of government benefits, limitations imposed to secure and maintain the benefits, properly draft the necessary legal documents, help determine what it will cost to provide for the child’s needs today, tomorrow and for their lifetime. A Certified Divorce Financial Analyst (CDFA) with a specialty of Special Needs Planning

 

 

The Divorce Resource Center of Colorado is committed to changing the way our society divorces. We envision divorce to be a process that does not end with a Decree, but one that is a catalyst for change that leads to new beginnings. Our goal is to provide resources that will empower clients in each and every step of their journey through the difficult life transition of divorce and beyond. Join us for our Second Saturday series! CLICK HERE for more information!

 

 

 

Your Divorce Can Create Empowering Choices!