The Danger of Do-It-Yourself Divorce In Pensacola Florida

Ken and Barbie have been married for 20 years and have owned their current home for over 10 years. Without the benefit of legal or tax advice, they decided to divorce, with Ken taking his retirement and Barbie taking the equity in the home, which is equal in value.

It appears to be equitable until a year later when Barbie decides to sell the home. It sells for the same market value as when the divorce occurred, but now Barbie pays all the sales costs. The unpaid balance on the home was much larger than normal because it had been refinanced for $750,000 two years earlier.

When Ken gave Barbie his equity in the house, he also gave her his tax liability in the home.  Barbie has a substantial capital gain because the home was purchased for a much lower price ten years earlier.  Capital gain is calculated by taking the sales price minus sales costs, plus capital improvements made, and subtracting the purchase price.

Since she is single, she has a $250,000 exclusion, and the balance of the gain of $456,750 will be taxable as long-term capital gains.  Let's assume her rate is 15%, and Barbie would owe $68,513 in capital gains taxes.

When calculating Barbie's net proceeds from this sale and accounting for the sales costs, mortgage balance, and federal taxes due, she realizes only $88,487 in this example, while Ken walked away from the divorce with the full value of his retirement account of $225,000.

It doesn't appear to have been an equitable settlement.  Contributing to this inequity was an apparent misunderstanding of how taxes are calculated and that the expenses incurred by selling the home as a single person would be borne solely by herself.

If the transfer of the residence is related to the end of a marriage, no gain or loss is recognizable. If the transfer is within two years prior to the divorce or one year following, it is treated as a gift with no gift tax due. There is no change in basis; it is carried over to the gifted party.

A marriage is a legal arrangement, and divorce deserves the benefit of expert advice.  An attorney familiar with potential tax consequences could have advised his/her client about the potential tax consequences and suggested a more equitable division of assets.