When dividing assets in a divorce, it may look like two assets have the same value. However, once taxes are factored in, the result can be very different. You may have initially paid the same for each asset, but if the asset is subject to penalties, capital gains taxes or income taxes, the true value of the asset may change. To reach a truly equitable division in a Florida divorce, keep the following information in mind.
Dividing retirement accounts
If a 401(k) is on the table in the property division process, you may decide to take money out of the account and give it to your ex. However, if you do so, the transfer could be subject to a 20% tax withholding, as well as an early withdrawal penalty if the account holder is under age 59.5.
To avoid these taxes and penalties, you need a legal document called a qualified domestic relations order (QDRO). A QDRO is separate from your divorce decree, although it also must receive the approval of both the court the 401(k) plan administrator. The transfer in the QDRO can be either a trustee-to-trustee transfer to a rollover IRA, or it can be a direct transfer from the 401(k) that will then be contributed to a rollover IRA within 60 days of the transfer. The QDRO and divorce decree should also refer to the transfer as a percentage of the account, rather than a specific dollar amount.
If an IRA is on the table in the property division process, you do not need a QDRO to split it, but the split still must be via a trustee-to-trustee transfer.
Splitting the family home
If you plan on selling the home and splitting the proceeds, or if one party is going to keep the home and buy-out their ex’s share in the property, it is important to get both an appraisal and ascertain the cost basis of the home. Also, depending on the circumstances if the home is eventually sold, the homeowner may need to pay capital gains taxes on the sale. And, if the spouse who is not retaining the home had been using it as a home office leading to depreciation, the cost basis should reflect this amount.
Property division is complex
As this shows, there is more to property division than simply splitting assets in two. The true value of the assets, keeping taxes, penalties and fees in mind is essential. A family law attorney can help divorcing Floridians work through the property division process to ensure a fair result is reached.