Spouses must consider depreciation recapture when assigning rental properties. Recapture reduces a property’s cost basis and may lower that property ‘s value because of the higher taxes imposed when the property is sold.
The capital gains exclusion, $250,000 for singles and $500,000 for couples, is also important. If the property is sold immediately, none of the gain qualifies for the capital gains exclusion. This reduces the asset’s actual value received by the taxes paid at its sale.
If a rental is converted into a primary residence, the spouse receiving that property must live there for at least two of the five years before the sale for any of the capital gains exclusion to apply to that sale. Loss of that tax exclusion reduces the value of the property for the spouse that received that property.
Except for four exceptions, divorce property transfers usually have no tax consequences.
An overlooked exception is the gift of future interest. It is ineligible for the unlimited marital deduction, the annual gift exclusion that is $15,000 in 2021, or the exclusions for gifts to noncitizen spouses which is $159,000 in 2021.
This should be transferred as a present interest, or a gift tax should be calculated as part of the negotiated transfer of future interest. Because it will be a cost or expense incurred to the transferor, the gift tax may be added to the asset’s value to provide an offset of equal value to that spouse in return for the gift of a future interest.
A business may be declared as a marital asset. S corporation status can impact its value because of the absence of corporate income taxes.
Asset appraisal and business valuation are needed because depreciated buildings, physical property and intellectual property may be undervalued. It is also important to review net operating losses because there may be tax value that can offset ordinary income and reduce tax liability.
Retained earning should be reviewed for hidden assets along with personal expenses paid by the business. Personal expenses paid by the business should be added to personal income for child support and spousal maintenance.
Know the type of business valuation is being used because it will impact the value being allocated. Fair market value and fair value are two usual methods. Minority shareholder or marketability discounts can reduce the business’ final appraised value using fair market value.
Attorneys can review important financial documents and provide options. They can also protect your rights in a divorce.