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The divorce process comes with many challenges, such as how to divide property. Property division can prove particularly complicated, especially when it comes to taxes. A common question facing individuals is whether assets are taxed during a divorce settlement. Here’s what you should know about how assets are classified in Florida divorce cases, what the tax implications are, and where many disputes often arise.
Marital vs. Non Marital Assets
Florida follows the principle of equitable distribution during divorce. This means that assets are divided fairly. However, this doesn’t necessarily mean equally. To understand how this works, it’s important to first know the difference between marital and nonmarital assets.
Marital Assets
Marital assets include anything acquired during the marriage. This may include things such as:
- The family home
- Joint bank accounts
- Retirement savings
- Businesses started while married.
These assets are typically divided between both spouses.
Nonmarital Assets
Nonmarital assets are those owned before the marriage or received as gifts or inheritance by one spouse during the marriage. These are usually kept separate and aren’t divided unless they’ve been mixed (or “commingled”) with marital assets.
Are Marital Assets Taxed?
The good news is that assets transferred between spouses during a divorce are not taxed. According to IRS rules (Section 1041), no taxes are triggered when property is divided as part of a divorce. This means that whether you are receiving the family home or splitting retirement accounts, there’s no immediate tax bill from the transfer of those assets.
Grey Areas and Contested Assets
While the basic distinction between marital and nonmarital assets seems straightforward, things can get complicated when assets are commingled. Commingling occurs when nonmarital assets are mixed with marital property over the course of the marriage. Here are a few common areas where disputes arise:
1. Retirement Accounts
Retirement accounts can be tricky. If you or your spouse contributed to a retirement account during the marriage, those contributions are considered marital property. However, if one spouse had the account before the marriage, figuring out what portion of the account is marital and what is non-marital can be difficult. A Qualified Domestic Relations Order (QDRO) is often used to divide these accounts without taxes or penalties.
2. The Family Home
If one spouse owned the home before the marriage but both contributed to the mortgage or made improvements during the marriage, the house might be considered part marital, part nonmarital. In these cases, the court may need to determine how much each spouse is entitled to based on their contributions.
3. Businesses
If a business was started by one spouse before the marriage but grew significantly during the marriage, the increase in its value may be considered marital property. This often leads to disputes over how much each spouse should receive.
What About Taxes After Divorce?
Although dividing assets during a divorce doesn’t usually result in taxes, there may be future tax implications depending on how those assets are handled after the divorce.
- Capital Gains Tax: If you receive assets like real estate or investments and later sell them for a profit, you may have to pay capital gains tax. For example, if you get the family home in the divorce and sell it later on, any profit may be subject to this tax. The primary residence exclusion may allow you to avoid some or all of this tax if you lived in the home for at least two of the five years before the sale.
- Retirement Accounts: Dividing retirement accounts can also have long-term tax consequences. If you receive a portion of your spouse’s retirement account, you won’t be taxed at the time of transfer (as long as a QDRO is used), but you may have to pay income tax when you start withdrawing funds after retirement.
- Alimony and Taxes: Before the Tax Cuts and Jobs Act (TCJA), people who paid alimony could deduct those payments from their taxable income, and the person receiving alimony had to count it as taxable income. However, with the new law, for divorce agreements finalized after December 31, 2018, the alimony tax deduction was removed. This change is permanent, meaning that even after the TCJA expires in 2025, the old rules allowing alimony deductions won’t come back.
Avoiding Common Pitfalls
To ensure that assets are properly classified and divided in a way that avoids unnecessary taxes, it’s important to:
- Keep detailed records of any property owned before the marriage.
- Work with both a qualified attorney and tax professional to identify potential tax issues.
- Be prepared for disputes over commingled assets and work with experts to resolve them fairly.
The Attorneys at Orlando Family Team Help Floridians Navigate Divorce & Asset Division
In a Florida divorce, marital assets are not taxed when they’re transferred between spouses. However, assets like real estate, retirement accounts, and businesses may have future tax implications. It’s crucial to understand the difference between marital and nonmarital property, especially when dealing with commingled or contested assets.
If you have concerns about how your assets will be divided in your divorce or how taxes might affect your settlement, contact the team at Orlando Family Team. We can help guide you through the process and protect your financial future. Contact us today to learn more!
