The division of assets between the spouses is an important decision to finalize a divorce. The exercise looks relatively simple: assign a value for each of the assets and divide them based on a mutual agreement between the parties.
The challenge is to make a fair division which requires an analysis to determine their value after they’re converted to cash.
Assume the two major assets in the example, a retirement account and the equity in the home, are equal at $100,000. It might seem logical to give the home to one spouse and the retirement account to the other. However, if the person receiving the home decides to sell the home, the net proceeds could be considerably less than the spouse receiving the retirement account.
Let’s pretend that the spouse with the home negotiates a lower price of $475,000 due to current market conditions. The former couple had owned the home for many years and refinanced several times, pulling money out of the home each time. When the remaining spouse sells the home, there could be a considerable gain that was never recognized.
As a single person, he or she is now only entitled to $250,000 exclusion and would have to pay tax on the excess gain. After paying the sales costs, outstanding mortgage balance and the taxes due on the gain, the remaining spouse would have net proceeds of $24,375 compared to the $100,000 that the former spouse received in the settlement.
The message in an example like this is to examine and consider the potential expenses that may be involved with converting the assets to cash after the divorce. Obviously, expert tax advice is valuable in making such decisions.