Understanding the Importance of Sheltering Capital Gains to Decrease Financial Loss after Your Divorce Settlement | Get Financial Freedom Tips | Transform Your Financial Future


Tuesday, September 20, 2011

Understanding the Importance of Sheltering Capital Gains to Decrease Financial Loss after Your Divorce Settlement

Whether you have already begun the process of getting divorced or are only researching divorce lawyers at the present time, you want to think about the future and what the tax burden of your divorce settlement might entail. A financial advisor can provide you with the information you need to prepare for capital gains taxes and help you take advantage of any potential capital gains shelters that may be available to reduce the tax burden on your divorce settlement.

Understanding the Importance of Sheltering Capital Gains to Decrease Financial Loss after Your Divorce Settlement

A Capital gain is the difference between the original purchase price of an asset (such as your home) and how much it is worth in the current market. Unless you and your ex-spouse plan ahead and carefully negotiate the terms of your divorce settlement, both of you may become burdened with a substantial tax burden as a result of the capital gain in your marital property. In order to avoid unnecessary tax burdens, it is essential for you to consult a professional for advice concerning your divorce settlement. The assets and important topics you should discuss include the following:

• Marital home

• Other jointly held real estate

• Potential alimony payments (whether you are the recipient or payer)

• Retirement accounts whether individual or joint

• Child custody

• Tax credits that pertain to the children

• Potential earning capacity after getting divorced

When the average person looks at divorce assets it may appear many are of equal value when in reality they may have a lower cost base thus resulting in higher capital gains. One example of this is the acquisition of an asset that has a current market value of $100,000 but originally cost only $25,000, resulting in a capital gain of $75,000 of taxable capital gain. Getting divorced is such an emotional issue that many people make serious mistakes based on emotions when they make decisions about their divorce settlement. For instance, a woman may wish to retain the marital home because of the children while a man may prefer to choose the retirement account. The key issue of importance is deciding if you have the education and financial resources necessary to make the money necessary to keep a home operating efficiently.

If you fail to shelter your divorce assets from capital gains taxes you face potential financial ruin because of a tax burden that could have been avoided. For instance when one party in the divorce desires to retain ownership of the marital home, there can be a serious financial burden because of higher interest rates on the mortgage, property taxes, home maintenance and repairs and homeowners' insurance premiums. On the other hand, if you and your ex-spouse maintain joint ownership of the home you face many capital gains tax benefits when you do decide to sell the house. When you are a single homeowner you are only allowed to shelter capital gains for a maximum of $250,000 but jointly held property qualifies for twice that amount or $500,000.

If you take the right steps to shelter your capital gains you will not incur a large amount of debt, be forced into bankruptcy or be saddled with large tax burdens just because you are getting divorced. The key is learning to plan ahead for capital gains and take advantage of those shelters when you negotiate your divorce settlement.

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