Skip to Content Skip to content
Divorce and Taxes – A 4-Part Guide to Avoiding Costly Mistakes – Part 3: Common Tax Mistakes Divorcing Couples Make–and How to Avoid Them
Dividing assets in a divorce isn’t just about splitting everything 50/50—it’s about understanding the real, after-tax value of each asset. Failing to factor in taxes during the division process can leave one spouse at a serious disadvantage and result in unpleasant financial surprises down the road.
In Part 3 of our 4-part series, Lili Vasileff, a Certified Divorce Financial Analyst (CDFA) at Wealth Protection Management, and Stacy Collins, a Certified Public Accountant (CPA) at Stout, share insights on common mistakes to avoid in asset division based on their extensive experience working with divorcing clients.
How to Divide Divorce Assets Fairly While Minimizing Tax Consequences
Collins suggests “tax-effecting” certain assets, such as a brokerage account. This means calculating the taxes you would pay if you sold everything today, then dividing the after-tax value. This is helpful if one spouse is to receive the brokerage account and the other receives a cash-equivalent value. Also, you should split individual assets, not just whole accounts, especially for brokerage accounts, so that each spouse has the same cost basis for tax purposes.
Tax-Smart Asset Division Tips for Divorcing Couples to Avoid Costly Surprises
Vasileff stresses the importance of looking beyond the initial numbers: It’s really smart to think forward and say, ‘Maybe if I can’t afford this house and I have to sell it in two years and it’s all on me, I only get the exclusion up to $250,000, whereas if we sold it as a couple, we could have had a $500,000 exclusion and saved ourselves a lot more in profit.’
Collins advises clients to keep good records. Accurate record-keeping helps determine the true cost basis of assets and avoid future tax surprises.
Other Common Divorce Tax Mistakes That Can Cost You
Vasileff says one common mistake in divorce, especially among high-net-worth individuals, is overlooking past financial losses that can impact future taxes. Many individuals have complex tax situations, including loss carry forwards — losses from selling investments, properties, or businesses that exceeded their gains at the time. These losses can often be carried forward for up to nine years to offset future profits, reducing tax liability.
A less financially experienced spouse may be unaware of these losses carry forwards and their potential value in a divorce settlement. For example, if a spouse plans to sell a home in a few years, these losses could be used to offset capital gains taxes, ultimately preserving more of the profit. Consulting a CPA is important to verify that the loss carry forwards are accounted for and properly utilized during divorce negotiations.
Vasileff warns against transferring assets without understanding the tax implications. Some assets, like retirement accounts, cannot be transferred without negative impact of taxes during a divorce without a final certified judgment. Stocks and brokerage accounts may also present issues if cost basis information isn’t properly tracked. A real-world example is stock—if one spouse receives shares purchased years ago at a low price, they could face a hefty tax bill when selling due to capital gains. Without proper planning, asset transfers during divorce can lead to unexpected tax burdens.
Collins adds that many people make the mistake of assuming cost basis information is easy to find. Sometimes it is, sometimes it’s not…if you’re trying to document your cost basis, meaning what you paid for the asset compared to what you sold it for, there might be some detective work you have to do. Homeowners, for instance, may need to find records of past home improvements to reduce their taxable gain when selling.
An Example of a Financial Trade-Off in Divorce That May Seem Fair But Can Lead to Financial Consequences Later
A clear example of a financial trade-off in divorce involves the decision to keep or sell the marital home. At first glance, keeping the house might seem like a fair and straightforward choice. However, as Vasileff points out, the long-term financial implications can be much more complex. While owning the home offers potential tax benefits and the opportunity for appreciation, there are also significant hidden costs if you decide to sell later. Understanding these trade-offs is essential to making informed decisions during the divorce process.
If you decide to sell the house later, you may face substantial expenses, including title and escrow fees, transfer taxes (especially in states like New York), legal fees, and realtor commissions. Additionally, if you’ve used part of the home for a business purpose, you may need to repay depreciation-related tax benefits.
One spouse may be eager to keep the house due to sentimental value, while the other may be willing to trade it for other assets. However, this trade can have significant financial consequences if the costs of maintaining or selling the house are not fully considered. With rising mortgage rates and the practical challenges of relocating, what seems like a fair trade initially can become a financial burden down the road.
For more information, see Part 2: How to Minimize Capital Gains Taxes When Selling the Marital Home After Divorce
Vasileff emphasizes the importance of looking beyond the surface numbers and considering the emotional, financial, legal, and tax implications when making these decisions. Having a third-party professional guide you through these complex choices can help you avoid costly surprises in the future.
Plan Ahead to Minimize Taxes in Divorce Settlements
The emotional weight of divorce can make it easy to overlook the long-term financial impact of tax decisions. But with careful planning and guidance from experienced professionals, you can avoid many of the most common—and costly—mistakes.
At Vacca Family Law Group, we help clients take a thoughtful and informed approach to asset division. Schedule a free introductory call to learn how we can support you through your divorce with clarity, care, and tax-savvy strategy.
Join us for the final part of our 4-part blog series, where we’ll explore how to future-proof your financial well-being through long-term tax planning.
More from this series:
- Part 1: Hidden Tax Traps in Divorce: What You Need to Know Before Dividing Assets
- Part 2: How to Minimize Capital Gains Taxes When Selling the Marital Home After Divorce
- Part 4: Long-Term Tax Planning for Divorce: How to Protect Your Financial Future
