Divorce Tax Implications for Businesses and Real Estate

 Posted on June 17, 2015 in Property Division

When a couple divorces and children are involved, there is a lot of discussion that goes into the tax implications of custody and support. However, the tax consequences of every aspect of divorce should be considered, especially when it comes to businesses and real estate. The division of income producing property, businesses, and real estate can have significant impacts on the final division of assets and liabilities in a divorce.

Tax Implications for Businesses

Income producing property, such as rental property or commercial buildings, can add a whole new level of complexity to a divorce case. Depreciation of income producing property decreases the value of the property over time, yet any improvements made to the property increase the underlying basis. It is important that you have a professional evaluate the adjusted basis of the property before determining how it should be divided in a divorce.

For businesses, such as partnerships and S-Corporations, the adjusted basis of the asset can increase and decrease over time. If one spouse takes a distribution or the company suffers losses then the adjusted basis of his or her investment would decrease. Conversely, retained earnings in the business could increase the overall adjusted basis in the company.

This is incredibly important to remember in a divorce because the adjusted basis at the time of the divorce could be vastly different than the basis at the time of the initial investment. It could not only cheat one spouse out of a proper division of assets, but it could also cost much more in terms of taxes.

Tax Implications for Real Estate

For non-income producing property, such as a family home, there are other important tax implications to consider. The federal tax code allows each spouse to exclude up to $250,000 from his or her income tax on the gain of the sale of the primary home if certain circumstances apply. Called the “two out of five rule,” a taxpayer must live in the home for two of the five years prior to the sale of the home and not have applied the deduction in the last two years. In a divorce, the requirements can be met by only one spouse, which is important if there was a separation prior to the divorce.

In addition, the tax deductions available for the payment of real estate taxes and mortgage interest payments can have one of the biggest benefits available to a spouse in a divorce. The tax deductions depend on a number of factors, including how the home is titled, whether the home is a primary residence, the name(s) on the mortgage, and in some cases it even depends on the wording of the final divorce decree.

Call Our Office Now

At Davi Law Group, LLC, our skilled DuPage County family law attorneys understand the intricacies of taxes in a divorce case. Call or contact our office today if you have family law questions in Chicago or the western suburbs for a confidential and free review of your case.