Are There Any Tax Traps I Should Try to Avoid During My Divorce?
We’ve previously discussed new tax strategies that could fill the place of the alimony tax deduction disappearing. This is a question and concern we frequently hear from clients, as alimony-paying spouse being able to deduct these payments helped move a couple towards divorce negotiations and arguably created significant motivation when it came to providing alimony payments at all. While we have already covered such topics as switching out alimony for a grantor trust and other methods of making up for the deduction, below, we discuss related tax traps that you also want to be aware of in ensuring that your divorce is tax efficient.
Opportunity Zone Compliant Investment Funds
The new rule concerning alimony not only results in a number of spouses with a higher income minimizing alimony payments, but it extends to every other area of a divorce settlement, including forcing a higher income spouse to liquidate some of their assets as well, which then triggers taxes in the form of capital gains. In these cases, Individuals engaged in divorce should be aware of the recently-introduced Opportunity Zone Compliant Investment Funds {“Opportunity Zones Funds”), can defer these gains and even make future gains on invested funds tax-free over the span of 10 years, providing a meaningful offset for the loss of the alimony deduction down the road. In addition, for couples engaged in a complex divorce, where income exceeds more than one million, other mitigation tools can reduce tax bills by five to 10 percent of the income, freeing up funds for other needs.
Delaware Statutory Trust Funds
It is also important to keep in mind that appreciated income-producing real estate can greatly affect taxation and income calculations when it comes to divorce settlements. Let’s say for example a couple owns a high-value apartment complex that they do not want to continue owning together. If the property is paid off and sold, capital gains tax can be significant— as in, approximately 20 percent of its total value. However, by structuring a portfolio with Delaware Statutory Trust funds (also known as “DST Properties” and “1031 exchange properties”), property can be sold and the equity can be transferred to new funds on a tax-deferred basis, which then preserves the entire value of that real estate investment.
Other Options
Property settlement agreements allow you to transfer property tax-free via ta specific agreement, which then allows the parties to sell the property and split the proceeds. In addition, you should speak with your divorce attorney about what makes sense in terms of your filing status and what will be most beneficial (i.e. by filing as “head of household,” “single,” etc.).
Contact Our Florida Divorce Attorneys to Find Out More
If you live in Florida and have any questions about ensuring that your divorce is as tax-efficient as possible, contact our experienced Orlando divorce attorneys at Arwani Law Firm, PLLC today to find out more.
Resource:
kiplinger.com/article/taxes/T065-C032-S014-getting-divorced-avoid-these-2-tax-traps.html
