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Divvying Up? Check Taxes

By ANNA PRIOR June 28, 2009 The Wall Street Journal

When divvying up assets in a divorce, make sure you consider what they would be worth after taxes. That's particularly important in community-property states, which mandate a 50/50 split.

"It's important to know that what you do has tax consequences for both parties," says Jackie Perlman, a tax analyst with the Tax Institute at H&R Block.

Take a couple that has an investment portfolio with stock and taxable bond funds that appear to have equal value, and one spouse gets the stock funds and the other the bond funds. Factor in capital gains or the fact that interest on bonds is fully taxable, and the values of those funds don't hold equal weight.

"All of a sudden, you don't have apples to apples anymore," says Amy Barrett, a certified divorce financial analyst in Rockford, Ill.

Another tax issue could arise when divorcing couples sell their house. If a couple bought a house a while ago, capital gains from a sale could be large despite the current housing-market slump.

If the house is in the name of just one spouse, any gain above $250,000 must be reported as taxable income, she says. But if the couple sell the house jointly, they can get a $500,000 tax exclusion. In some cases, Ms. Barrett says, that could wipe out any taxes owed.

Write to Anna Prior at anna.prior@wsj.com


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