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When negotiating a divorce settlement agreement, there are many things to keep in mind. Assets that are worth the same amount at first glance are often not of equal value to each spouse. Below is a sample of three important things to consider.

Pre-Tax Versus Post-Tax Assets

Assets in an Individual Retirement Account (IRA) are not equal to assets in an after-tax brokerage account. Every dollar that is withdrawn from an IRA, or similar retirement account, counts as income and is taxed as such. When withdrawing a dollar from a brokerage account, there is no taxable income created in the eyes of the IRS. If an asset is sold at a gain in the taxable account, the capital gain portion of the sale is taxable, and if the asset was held for over one year, the gain would be taxed at a lower capital gain tax rate.

Example: Sally agrees to let Sam keep his $100,000 individual brokerage account so that she can keep her $100,000 IRA. After the divorce, Sally pulls $5,000 out of her IRA for some expenses. That $5,000 is now added to her taxable income for the year, and she will have to pay tax on the full $5,000. If she is in the 22% federal tax bracket, that $5,000 becomes $3,900 and that’s before state tax and any penalties if she is under age 59.5. Meanwhile, if Sam needs $5,000 from his brokerage account, he doesn’t need to worry about any early withdrawal penalty, and if there is not a taxable gain associated with the withdrawal, he gets his $5,000 with no tax consequence.

Cost Basis

So, what if Sally also has a $100,000 brokerage account instead of an IRA, then that account should be the same as Sam’s, right? If they are holding the exact same holdings with the exact same cost basis, then yes, but this is almost never true. Cost basis and the ensuing capital gains when assets are eventually sold will have a significant impact on how much money either party walks away with. For example, if Sam holds $100,000 of Apple stock with a cost basis of $25,000, and Sally also holds $100,000 of Apple stock with a cost basis of $50,000, then, assuming they will be in the same tax bracket, Sam’s account has a larger tax consequence waiting for him if he sells the stock versus Sally. Sam would have to pay tax on $75,000 of capital gains versus only $50,000 for Sally.

Tax Laws

Let’s assume Sally and Sam have a primary home and a vacation home, neither property has a mortgage, and each property would have the same capital gain of $200,000 if sold. If each keeps one of the properties, would this be an equal split? Assuming all else is equal, then whoever is keeping the primary home has a tax advantage if selling the properties soon after the divorce. This is due to the tax code excluding up to $250,000 of capital gains ($500,000 if still married) when selling a primary home that the owner has lived in for two of the last five years (Topic No. 701 Sale of Your Home | Internal Revenue Service (irs.gov)). So, the person selling the primary home, in this case, would owe no tax, while the vacation home sale would create a tax liability on the $200,000 capital gain.

Note that if the capital gain on the primary home is above $250,000, it can make sense to discuss selling the house before the divorce is finalized, given the $500,000 exclusion for married couples.

These are just three things of many to keep in mind when divorce negotiations are underway. A financial professional can assist you in reviewing proposed settlements to make sure different aspects are considered that may otherwise be missed.


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