Property settlements have tax consequences which parties have to take into consideration when they forge agreements or get orders from courts. Tax liabilities always follow property even if the transfer of property is involved in family law proceedings.
To ensure that there is a fair division and that a party is not unfairly burdened with payment of tax liabilities it is best that parties study and include the tax effects of their property settlement before making it final.
Capital gains tax, income tax and stamp duty are the taxes that must be accounted for during negotiations or discussions for property settlement. For example, if the couple sells their home, capital gains tax must be paid if the value of the home was sold at a price higher than the price at which the home was bought by the couple. Capital gains tax is also imposed on trading stocks.
Stamp duties are incurred whenever there are transfers of property from one party to another. Even if the parties endeavoured to divide their properties equally in an agreement the peaceful transfer of assets is still subject to stamp duty.
Alimony or spousal maintenance is considered as income received, thus, subject to income tax. The spouse who pays the maintenance can claim the amount paid as a tax deduction. So actually, what happens is that the payee is the one who will be shouldering the tax liability which might not be good for the payee especially if there is a dire need for financial support.
There are methods by which parties can bear the brunt of the tax debts. The agreement between the parties may specify who will pay the tax debts regardless of the division. This happens when the divorce or separation is amicable and one party is wealthier than the other.
However, what usually happens is that one partner or spouse takes control of the assets and controls the cash flow. The parties will then account for all the income coming from all financial sources until the final agreement or court order.
Then in the property division, one party may receive a lesser amount or an unequal share because the other party will bear the tax debts and must be compensated for doing most of the work. It may also be that the parties will divide the properties or income equally so that both parties will have an equal share of the tax debt.