Many divorcing spouses or clients seeking a legal separation, ask a variety of tax-related divorce questions. Here are some divorce-related tax issues in a Connecticut Divorce. Once such questions is as follows:What Assets Divided in a Connecticut Divorce are Taxable?
In many situations, one of the most disputed issues in a divorce is the distribution of the marital assets. Under the Internal Revenue Code (IRC) Section 1041 (a), no gain or loss is recognized on the transfer (acquisition or distribution) incident to divorce provided such transfer occurs within one year after the divorce or related to the ending of the marriage. The ending of the marriage is defined in the divorce or separation agreement and the date of the court appearance in a Connecticut Court. Often, one of the most significant marital assets is the marital residence and/or a business. The values of these assets should be appraised by certified evaluator expert in the early stages of the divorce process. If spouses divorce through divorce mediation, the spouses often use one appraisal as long as the appraisal is neutral and mutual. If you live in your “Principal Residence” for any two of the last five years you are eligible for a capital gain exclusion upon the sale of the home. This exclusion is $250,000 for a single taxpayer and $500,000 for a married couple. Because of the significant difference in tax treatment, the tax consequences related to the sale of the marital home should be considered early on in the divorce settlement negotiations. If the sale of the marital residence is contemplated and the higher exclusion is contemplated, amicable divorce spouses are encouraged to consider the transaction prior to the termination of the marriage in order to take advantage the higher exclusion amount in order to secure more proceeds from the sale.