Dig a Little Deeper: Paying the Capital Gains Tax After Separation

Capital Gains Tax After Separation

In family law, capital gains arise when dividing family property. Often overlooked by family lawyers in the division of family property, they can be a hidden liability that only becomes known after a separation agreement has been signed. And when it comes out of hiding, someone may be getting a bad deal.

When do capital gains come into the picture? They apply to any investment or property that has increased in value since purchase, and includes the family home, stocks or a rental property. The amount of the increase in value of the asset that attracts capital gains varies depending on the asset, but one thing is true: the seller pays for it.

Let’s look at a specific scenario – a rental property is not being immediately sold.

When one spouse keeps the family home and the other keeps the rental property, it is understood that the spouse with the rental will have a larger future tax burden due to capital gains. In order for both spouses to be equally responsible for the resultant tax bill, the spouse keeping the rental must demonstrate the following:

  • A clear intent to sell the property in the near future;
  • Steps taken to have the property sold such as obtaining a realtor;
  • A timeframe in which the property will be listed for sale and/or completion of sale (depending on the circumstances).

If the spouse with the rental demonstrates the above, particularly a timeframe, then the other party will share in the capital gains tax burden at the time the family property is equalized. If the idea of the rental property being sold is merely speculative and a mere future possibility, the judge would likely not order the sharing of future capital gains. The law is clear: latent capital gains are not the responsibility of the spouse who does not receive the rental property.

A few tips for this scenario:

If you are negotiating a position where you receive a rental property, make a determination as to whether you are going to keep it indefinitely or sell it upon transfer. It makes a difference when addressing the capital gains issue.

If you plan to move into the rental property you are changing it to your primary residence. This changes the amount of capital gains payable.

Consult your accountant to understand exactly how much capital gains tax is at stake in your divorce settlement.

Last, but not least: ask a legal professional about the tax implications of your settlement.

Coach My Case knows the deep dive of capital gains and family property divisions. Contact the Legal Navigator now to book your free consultation.