Why Consider Cost Basis When Setting Property Division Goals?

On Behalf of | Oct 23, 2019 | Property Division

Dividing assets and liabilities in divorce involves many difficult decisions. In Connecticut, courts allocate marital property under the principle of equitable distribution. That does not necessarily mean that assets and liabilities are divided between the parties in a 50-50 even split. What the judge may find fair and equitable may vary substantially based upon the individual facts and circumstances of each case.

In preparing for a property division dispute, and certainly throughout the process, it is important for an individual to look at the entire picture to help to avoid unintended surprises. Many individuals understand that transfers of property between spouses incident to divorce generally do not trigger immediate tax obligations under Internal Revenue Service rules. However, it is critical to work with an experienced lawyer to fully understand the potential tax implications of the various assets in a diversified and substantial marital estate to make reasoned decisions concerning the division of property.

Capital Gains And Property Division Results

An important tax consequence that can help you to analyze value involves evaluating potential capital gains and loss rules as applied to different marital assets. It is often tempting for individuals to focus solely on the current market value of assets in setting forth goals for resolving property division issues.

In divorce, the individual who is awarded the asset retains the pre-divorce cost basis of the asset. In other words, the market value of the asset at the time of the divorce does not modify the original or adjusted cost basis. The lack of immediate tax consequence in the transfer of title to property in divorce may make it difficult to consider potential tax liabilities when comparing two assets that seem to have the same fair market value today.

If the cost basis of one of the assets is low, while the cost basis of the second asset is relatively higher, the potential capital gains obligations will differ between the assets if you choose to sell, liquidate or otherwise dispose of the assets in the near future. If multiplied across many assets, the capital gains obligations may lead to high expenses for an individual—diluting the overall fairness of the property division plan. Analyzing these issues at the outset may help you in setting goals and in determining what assets to pursue to protect your future stability.

Market Forces Are Also A Factor

Clearly, there is no bulletproof formula for determining the future value of all assets in your marital estate. Appreciation or declines in market values can vary greatly between differing assets—and the investments remain subject to market risk, legislative risk, political risk and other factors for those investments that are help on a long-term basis. However, understanding the interplay of cost basis and current market value may provide you with a better insight into overall values of assets in the marital estate.

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