California is a community property state, which means that property acquired during marriage is presumed to be community property and is normally divided equally in divorce. But dividing an asset equally, doesn’t always mean you are receiving an equal value. For spouses with property and assets, extra care needs to be taken to ensure equitable division upon divorce.
When spouses own appreciated investment assets, such as stock, each spouse will ultimately owe separate taxes on the shares they sell after divorce. Here’s the catch for the unwary: Assume spouses own 100 shares of stock that is priced at $100 a share. If each spouse receives 50 shares in the divorce agreement, each spouse would have $5,000 of value. But, unless the 100 shares were all purchased at the same time, a spouse who takes 50 shares priced at $25 a share will pay more capital gains taxes on a sale of that stock than the spouse who takes 50 shares priced at $80 a share, even though both spouses received the same value of the divided shares. That is called the tax basis of the shares sold, which is different.
The spouse with the lower tax basis of $25 a share will pay more taxes on the sale of those shares than the spouse who has the higher tax basis of $80 a share. The same is true when an asset such as a retirement account is traded for a family residence. The spouse who receives the house will currently not pay tax on the first $250,000 of equity at the time of sale. (The exemption for married couples is currently $500,000.) But the spouse who receives a retirement account will (assuming no deductible offsets) will pay tax on the first $250,000 of their retirement withdrawals or pension payments.
With so many implications, it is important to retain an experienced family law attorney who can identify these issues so that the division of assets in your divorce does not leave you with an outcome that is much less than equal. Contact The Reape-Rickett Law Firm at (888) 851-1611 or visit our Contact Us page to schedule a consultation with an experienced family law attorney.