High-asset divorces in Texas involve special considerations, including those involving taxes. Dividing complex and highly valued community assets in a divorce can result in substantial tax liability.
Community assets in a Texas divorce can involve complex investment portfolios, multiple pieces of real estate, businesses, luxury items, such as boats or art collections or various sources of income.
Community property in Texas
There is no specific definition of a high-net worth divorce, but it is generally assumed to be one with at least $1,000,000 in assets. Texas is a community property state, which means that all assets acquired during the marriage are community assets, with some exceptions.
Under community property law, community assets are split equally. Spouses are free to agree to an unequal division, but a court will still review the agreement to ensure it is fair to both spouses.
Dividing community property is often one of the biggest challenges in a high-asset divorce, especially if the assets have significantly appreciated in value over the course of the marriage. Generally, capital gains taxes may be imposed upon the sale of community property.
Capital gains taxes
If you own several pieces of community property, this means you might face tax consequences for each property. If you use a piece of property as your primary residence, you can deduct up to $250,000 in capital gains from taxes as an individual or $500,000 as a married couple.
However, the capital gains tax exclusion does not apply to property that does not serve as your primary residence, such as rental properties or vacation homes.
Capital gains taxes may also apply with the transfer of stocks, bonds or other investments. Many high-asset divorces involve restructuring an investment portfolio. It is important to pay attention to the potential tax obligations through capital gains taxes from this restructuring.
Business interests
If you own a business, you must assign a value to your business and determine how it will be divided in a divorce. There are various options for division, such as splitting it with your spouse or keeping your business and giving up another high-value asset in exchange.
Whatever option you choose, examine ways to reduce your tax obligations. For example, your spouse might agree to a buyout over time rather than selling the business outright.
Retirement accounts
Retirement accounts that are not appropriately split in a high-asset divorce can also lead to major tax obligations. A qualified domestic relations order (“QDRO”) should be used when dividing retirement accounts. A QDRO is a special document that allows transfers of funds between retirement accounts without tax penalties.
However, a QDRO usually only prevents penalties when funds are transferred rather than withdrawn. A withdrawal from a retirement account could still result in tax penalties.
Additionally, QDRO’s are typically subject to specific requirements depending on the retirement plan. There is not a “one size fits all” QDRO. Thoroughly research QDRO requirements for your specific retirement plans to ensure they are correctly drafted before submission.
Careful tax planning is crucial in a high-asset divorce in Texas. Errors can be costly and, in some cases, undoable. There are several tactics you can use to reduce tax liability in your high-asset divorce and professionals who can help you learn which ones work best for you.