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What are the tax implications of property settlements in divorce?

High-asset divorces in Louisiana can be complex, especially when it comes to the tax implications of property settlements. 

Understanding these tax consequences helps ensure a fair and equitable division of assets.

Community property laws

Louisiana is a community property state. This means that all marital property, which includes assets acquired during the marriage, divides equally between the spouses. However, property acquired before the marriage or through inheritance or gift remains separate. The division of community property can have significant tax implications.

Capital gains tax

When spouses divide property such as real estate or investments, capital gains tax may apply. If a property sells as part of the settlement, the spouse receiving the proceeds may owe taxes on the capital gain. The gain is calculated based on the property’s value at the time of sale compared to its original purchase price. This tax can significantly reduce the amount of money each spouse receives from the settlement.

Retirement accounts

Retirement accounts like 401(k)s and IRAs are often significant assets in high-asset divorces. When these accounts are divided, they can trigger tax consequences. A Qualified Domestic Relations Order (QDRO) allows for the division of retirement accounts without immediate tax penalties. However, withdrawals from these accounts are subject to income tax, and early withdrawals may incur additional penalties.

Spousal support

Spousal support, also known as alimony, can have tax implications. For divorces finalized after December 31, 2018, the Tax Cuts and Jobs Act (TCJA) stipulates that alimony payments are no longer tax-deductible for the payer, nor are they considered taxable income for the recipient. This change affects how couples negotiate spousal support and property settlements.

Tax basis and asset transfers

The tax basis of transferred assets is another consideration. When one spouse transfers an asset to the other as part of the settlement, the receiving spouse inherits the asset’s original tax basis. This means that if the receiving spouse later sells the asset, they may owe significant capital gains taxes based on the original purchase price, not the value at the time of the transfer.

Understanding these tax implications can help divorcing couples and their attorneys make informed decisions, ensuring a fair and equitable settlement that considers all potential tax consequences.