A divorce is an emotionally and financially complex matter for couples in Maryland, and it is easy to make a mistake that can cost a lot of money in taxes without realizing it. This is especially true when it comes to transferring assets between the two parties as part of the divorce.
Normally, the IRS provides a special exception for the tax treatment of any asset that changes hands as a result of a divorce settlement. This applies to transactions that take place right at the time of the divorce as well as those a year earlier if they were part of preparing for the divorce and those two years after the divorce settles. These transfers may also be subject to gift tax limits, which would also shield them from being taxed as income by the recipient or taxed as a gift by the giver.
Why to avoid them
Usually, this tax exemption is a good thing that can save the couple money. However, under certain circumstances, it can actually be more beneficial to avoid the benefit and treat the property transfer like a sale of the asset from one party to the other. One example is a house that has appreciated in value. If one party sells their share in the house to the other as a post-divorce asset transfer, and then the other party sells the whole house, they may actually have less taxes due than if the two had transferred the house tax-free.
Tax-free transfers can be a pitfall that can obscure significant tax savings in special circumstances as long as the couple is willing and able to explore that possibility.