Separating assets also means separating the tax attributes related to those assets. Sometimes, it can be a complex calculation and can result in thousands of dollars in tax savings, or cost. The total tax effect of the asset separation will play a part in how the assets are divided. Here are a few examples that will come up, depending on the complexity of your tax return.
ESTIMATED TAX PAYMENTS
A married couple making joint payments, but filing separate returns, allow either spouse to claim any portion of the joint payments on their returns, if they agree. If an agreement cannot be met, the estimated tax that can be claimed for each spouse is the result of a calculation. If $100,000 of estimated tax was paid for 2015, and the tax showing on each former spouse’s return is $25,000 and $75,000, the estimated tax payments would be allocated 25/75 between the two of them. If the tax due is more or less than the estimated payments, the calculation would then allocate more of the estimated payments to the former spouse with the higher tax liability.
PASSIVE LOSS CARRYOVERS
Passive loss carryovers result many times on rental properties when the costs, including depreciation, exceed the amount of rental income generated. They also arise on an investment, when the owner does not actively participate in the business. Because the transfer of a passive activity incident to divorce is treated as a gift, passive loss carryovers must be added to the basis of that passive activity. If a rental property with a passive loss carryover is held as community property, this means that half of the passive loss carryover is added to the basis, while the other half will continue and can be used to offset passive income in following years.
CAPITAL LOSS CARRYOVERS
Capital loss carryovers generated by joint property in a community property state like California, are split 50/50. A loss carryover generated by separate property would follow the separate owner, but keep in mind that the character of the loss must be followed as well, short-term vs. long-term.
Legally separating means each former spouse will now have to file as Single. The separation agreement will be the guide for your CPA to file your tax return; however, the agreement can many times be silent on specific tax items. It is always wise to retain trusted financial counsel in the event of a separation. Be careful to understand the consequences of all transfers, especially on assets that carry with them tax attributes like those listed above.
