How to Avoid Capital Gains Tax in Divorce: Simple Strategies for Property Settlement
No one likes the thought of having to pay taxes, especially during an already emotionally taxing period like a divorce.
It can be difficult enough to come to an agreement with your former spouse about how to split up your assets without introducing taxation factors into the equation.
However, the reality is that not properly addressing capital gains tax (CGT) issues during a divorce can cause costly problems down the track for potentially only ONE of you.
This doesnt sound very fair right?
Make sure that does not happen to you.
At Justice Family Lawyers, we specialise in helping clients with their divorce proceedings and ensuring that their entitlements are protected. We understand the law and strive to be proactive in helping you create an effective asset division strategy so that you never take on more of a liability than you need to.
In this article, we will look into the different ways you can minimise any capital gains tax costs during your divorce.
Quick Summary
- Understand the law: Knowing the rules and regulations around CGT is essential, as any miscalculations could lead to a large tax bill in the future.
- Get professional help: A dedicated lawyer or accountant can help you come to an agreement with your former spouse that works for both parties, as well as abiding by the law.
- Create an effective asset division strategy: Consider the different ways in which assets can be divided and structured in a way that reduces or eliminates CGT and enables a fairer split of the assets.
What is Capital Gains Tax?
Capital gains tax is a tax imposed on any capital gains made when disposing of an asset, such as an investment property, shares or a business.
This includes when disposing of assets when getting divorced - i.e. when going through the financial division of assets and debts.
When an asset is sold, it is subject to capital gains tax in Australia and there are different requirements for assets held for different periods of time.
How to Avoid Capital Gains Tax in Divorce
If an asset is transferred from a sole name or from joint names to the sole name of one of the parties of the divorce, then there will be a CGT roll over event.
This means that CGT will not be payable at the time. But it will be payable in the future.
This means if you are obtaining a property that was subject to CGT - it will continue to be subject to CGT in the future.
You need to understand this when deciding which assets go where, as you may be the one that ends up with an asset that is subject to CGT when you sell it.
In general terms, all capital gains must be included in the income of the party that disposes of the asset. Any profits made need to be added to the taxable income and will be included in the gross income for taxation purposes.
Strategies on How to Avoid Capital Gains Tax in Divorce
When getting a divorce, it is important to work out a strategy for allocating assets that reduces, or even eliminates, any capital gains tax liabilities.
You may decide not to sell assets that are subject to CGT, and instead transfer them to one of the parties of the divorce. This will create a CGT roll over event.
Alternatively, you may decide that you want to sell the asset subject to CGT immediately, that way the CGT debt is realised and can be accounted for in the overall asset pool.
This means that the debt is shared between the parties, rather than it hanging over one party's head and eventuating in the future.
Transfer of asset to a party of a divorce
When one spouse transfers an asset to another spouse, a CGT event does not occur.
Instead, there is a 'rollover event' whereby any capital gains or losses are roll over and the capital gain is completely disregarded until the new owner disposes of the asset.
This is a useful strategy if one spouse is looking to transfer an asset to the other.
Utilise Exemptions
Certain assets are considered tax exempt and not subject to CGT, such as your primary residence, so it is important to look into the various exemptions and whether they are applicable in order to reduce CGT liabilities.
Final Thoughts
Dividing assets during a divorce can be confusing and complicated, and it's important to work with a qualified legal and financial advisor to ensure you are not taking on tax liabilities that could negatively affect your financial future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.