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Tax Consequences of Property Transfer in Divorce

Many of my clients are worried about two issues when it comes to transferring property pursuant to a divorce.  They’re worried either about their house (real property) or their retirement accounts.

Transfer of Real Property

During the marriage, spouses can transfer unlimited money and assets between themselves – tax free.  There is no transfer or capital gains tax on transfers between spouses.  After divorce, spouses (or ex-spouses I suppose) have up to 1-year from the divorce date to transfer property between them, tax free – even if the transfer was not mentioned as part of the divorce.

Transfer of Retirement Assets

If you take out money from any of your retirement accounts (401k, IRA, Roth IRA, 403b, pensions, etc.), you will incur a penalty and be taxed on the amount.  So when couples need to split their retirement accounts during or incident to a divorce, many people worry that they will get penalized and taxed.  However, if done property, that won’t be the case.  Any amount that is taken out or divided incident to a divorce, should be done through a Qualified Domestic Relations Order (QDRO).  It is a special document that is submitted to the retirement account administrators instructing them to divide the account without triggering any penalties or adverse tax consequences.

Before transferring real estate or retirement assets in a divorce, it’s best to consult with a knowledgeable divorce attorney so that you won’t make the mistake of having to pay Uncle Sam when you don’t need to.