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Divorce, Equitable Distribution, Marital Home, Uncategorized

Asset Trade – Divorce Best Practices

Asset Trade – Divorce Best Practices

Asset Trade – Divorce Best Practices

Jeff J Horn, Divorce Law Attorney

Dividing Assets in divorce – your best asset trade

Of course, dividing assets in divorce can be tricky. most likely, you prefer retaining certain assets. But, is it worth it to make an asset trade? Its called equitable distribution in NJ – make sure it is equitable for you.

What is an asset trade – in divorce?

 Start with the most common assets:

  1. Marital home
  2. Bank accounts
  3. Automobiles
  4. Retirement accounts
  5. Investment accounts
  6. Vacation homes
  7. Investment real estate

On the face of things, it may seem easy enough to trade one asset for another. For example an asset trade for the primary residence worth $500,000 for a retirement account worth $500,000. caution, what seems fair, maybe perilous.

Asset trading – but we are not Wealthy

Wealthy or not, details matter in your divorce asset trade. One big case – wealthy people – very simple divorce.  How?  Immediately before the divorce, the parties sold a business and received, after taxes, $50 million dollars. Simple enough split up the 50 million and the other assets are a piece of cake.

How to make an asset trade work

The key to asset trading is comparing Apples to Apples. For example, a bank account holds liquid cash. Keeping or transferring it creates no tax liability. A bank account requires no elaborate process to convey from one party to another. Bank accounts make for an easy asset trade.

 

Similarly,  most investment accounts  can be traded with minimal consequences. Clearly, investment accounts can trigger income and capital gain taxes. However, your broker can calculate net account games with a few keystrokes. Easy to figure out.

Trading – Real Estate

Typically, the marital home is the party’s primary residence. Gains on the primary residence enjoy significant federal income tax advantages.  On the contrary, vacation homes and investment real estate enjoy no such tax advantages. For example, trading a rental property with $300,000 in gain for a primary residence with $300,000 in gain triggers a significant tax liability for the spouse taking the rental property.  Be careful, that asset trade is not Apples to Apples. Depreciated real estate assets – a little trickier to calculate – keep proof of all expenses and improvements!

How about trading marital home equity for a retirement account?

Most retirement accounts are funded with pre-tax dollars. Hence, upon withdrawal income taxes will be due. Similarly, most pre-tax retirement accounts have early withdrawal penalties. Until age 59 and 1/2, a 10% early withdrawal penalty applies.  So trading a $500,000 primary residence for a $500,000 IRA is a bad deal for the IRA recipient.

Can this asset swap work?

Of course, a deal can be had. The IRA recipient will need to receive more like $650,000 in an IRA to trade the otherwise tax-free $500,000 marital home.  Double check my math with your accountant!

A couple of parting thoughts on divorce Asset Trading

Trade appreciating assets for appreciating assets. By and large, household contents and vehicles tend to depreciate. Avoid trading tax-advantaged assets for tax disadvantaged assets. Before you get excited about trading assets, talk to your family law attorney and your accountant. Preferably, talk to all of your professionals before committing to an asset trade that you may regret.

 

Related – Alimony Trial

 

Stephen Dawson on Unsplash