Splitting financial assets through divorce

[Savoyboy]

Planning for divorce and understanding tax considerations, I found this TurboTax article helpful:

https://turbotax.intuit.com/tax-tips/marriage/getting-divorced/L20NC66cf

That article has the following paragraph about Asset Transfers:

When a divorce settlement shifts property from one spouse to another, the recipient doesn't pay tax on that transfer. That's the good news. But remember that the property's tax basis shifts as well. Thus, if you get property from your ex-spouse in the divorce and later sell it, you will pay capital gains tax on all the appreciation before as well as after the transfer. That's why, when you're splitting up property, you need to consider the tax basis as well as the value of the property. A $100,000 bank account is worth more to you than a $100,000 stock portfolio that has a basis of $50,000. There's no tax on the former but when you sell the stock, you'd owe tax on the $50,000 increase in value.

We have a non-liquid private stock asset that can only be redeemed during a certain time of the year. We will include in our divorce decree the division of the value of that stock, which will have to occur post-divorce. The payments for redeeming the stock will likely be monthly payments over the course of several months. Using an example of a stock portfolio of $200K that has a tax basis of $50K, if $100K is redeemed and transferred to an ex-spouse, who is responsible for the tax of that redemption?

[Scooter1768 · Accepted solution]

Hello! Savoyboy, 

Thank you for your question.  As you already noted, there is neither gain nor loss recognized on transfers of property between spouses in a divorce. However, as I understand your situation, you are planning on redeeming stock and then transferring the half of the value to your ex-spouse and want to know which of you are responsible for the tax on the redemption of these shares. This situation has been addressed in the tax regulations and you may actually be able to elect how these shares are taxed and who bears the burden.

I recommend you consult your attorney and someone with knowledge of Regs. Secs. 1.1041-2(c)(1) and (2)), which effectively permits taxpayers to choose how divorce-related stock redemptions will be taxed. 

[ES CPA]

Good day Savoyboy,

Without having all the details of the stock plan (ISO, RSU, ESP) this is difficult to answer.

Some element of basis for the stock may be included in your W2 as ordinary income.  That amount will be counted as basis in the transferred stock. As your former spouse will be getting benefit of the basis that is included in your income and you are paying tax on; you may want to discuss this with your attorney.  After the stock is transferred; your former spouse would be responsible for the tax on any sale of the stock that has been transferred to them.

Thank you for reaching out to the TurboTax Community