Divorce & Taxes: What to Expect

What implications do alimony, child custody, child support, and property division have on your taxes? Lee Rosen, retired divorce attorney and founder of Rosen Law Firm, tells you what to expect.

Welcome to The Tax Center at North Carolina Divorce. I’m Lee Rosen.

We’ve compiled here in this center all of the information that we have about taxation of divorce in North Carolina. You’ll find the details of state and federal taxation and how it impacts you as you go through a divorce. In just a second, I want to tell you a quick story. I think it will surprise you about how taxes can sneak up on you as you go through a divorce.

But first, here on The Center, you’re going to find detailed articles, answers to your questions, forms, videos, everything that you need to know about dealing with tax issues in North Carolina. You’re going to find, especially, information about filing status, when to file, how to file, where to file. You’ll find details about taxes as they relate to child support, exemptions, and child care tax credits, and all of the other details relating to child support taxation. Alimony, which can be one of the trickiest issues to deal with, everything from the taxability of alimony to the deductibility of alimony as well as recapture issues, and then finally you find the information you need about out property division and how that’s taxed — everything from capital gains taxes to some other sort of hidden taxes that relate to retirement plan division. So there’s lots of information here, lots of details, everything you’re going to need to know.

So here’s the story. We represented a husband and wife, and they owned some property at the beach here in North Carolina. They’ve had it in the family for many years. They bought it at a pretty low price. They paid under $100,000 for it way back. It was a large piece of property, ocean front, and over the years it had gone way up in value, as you can imagine.

They also had other assets here in Raleigh — another home, and cash, and that sort of thing. It was a family that had done well over time, and, for whatever reason, the marriage had disintegrated. When we divided the property, the wife took the beach house. The husband took the house in Raleigh along with some other property, and life went on. Everything was good.

The thing you should know is that that beach house, because it had gained in value over time, it had accumulated the potential for capital gains taxes. None was paid at the time of divorce, but we built that in to the valuation. We discounted that house for the potential that those taxes would be paid down the road.

Well, they got divorced, and they were doing their own thing. And almost a year after the divorce, the wife decided she didn’t want to keep the beach house. She decided to put it on the market. Husband heard this through the grapevine and decided well, it’s been in the family forever, that he was going to buy it, and so he did. And he paid the wife a fair market value price for the house.

What he didn’t realize, and this really came back to bite him, is that he took that house at the tax basis that the wife had it on. So now he owns a $1 million plus house, and he’s going one day to have to pay the capital gains taxes on that house — a big, bad, surprise. And the wife got a big bonus, a windfall. She didn’t have to pay the capital gains, and that’s all because there’s a provision in the tax code that says in that year after divorce, the transferee takes the property at the transferor’s basis.

It’s complicated, and it’s tricky, but it’s exactly the kind of thing you don’t want to let sneak up on you. That’s why you want to spend time on this Center. That’s why you want to read these articles. Look at all the information here and make sure you’re well prepared and that you don’t get bitten by something sneaky in the tax code. This Tax Center will make sure you’re protected.

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