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Tax complications related to property division in divorce

Although divorce is common, it can also be very confusing for Illinois couples that are going through a breakup, especially when it comes to taxes. Indeed, unless one has already experienced the nuances of property division and other divorce-related complexities, the process can be intimidating. Still, the more an individual knows about what is involved, the better he or she will be prepared for coping with the different issues that will be encountered.

First, the division of marital property should be discussed because this is often the most difficult process during divorce. In most states, premarital property, gifts and inherited property will be excluded from property division, and the spouse who owns them will not be required to give them up. Marital property, on the other hand, is typically divided on equal terms. One will want to think about future tax liabilities on this property, such as capital gains taxes, while making decisions regarding the equal division of the assets.

Taxes are a very important topic to keep in mind. If an individual has yet to actually file for divorce and has only written a separation agreement, a tax filing as Married Filing Jointly will still be a cost-saving option available. Nevertheless, certain risks may be involved in this strategy if one or the other spouses may not have the ability to actually pay his or her share of the taxes. This would incur penalties and interest for both spouses.

Splitting up the family home also comes along with certain concerns. Various property division rules will apply in such cases, and they will vary state by state. If one of the ex-spouses wants to stay in the home, then he or she will have to "buy" the property from the other spouse. This "buying" is merely a non-taxable assets transfer. If it is decided to put the home up for sale, couples might qualify for a capital gains exclusion if the property is their primary residence and does not exceed specific home value limits.

By discussing the complications commonly related to divorce and property division with legal, tax and financial professionals, an Illinois resident can get a head-start on what is in store. Indeed, the more one knows about divorce ahead of time, the easier it will be in the long run.

Source: nerdwallet.com, "Divorce: Making Sense of the Confusion" J. Kevin Stophel, Jun. 03, 2014

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