Does the divorce court take into consideration tax consequences in delivering a property settlement?
No, the divorce court will take into account the tax consequences of property division. If, for example, a party would end up paying a large capital gains tax, the court may give him or her more marital property, in order to make up for that loss of money in capital gains tax.
On the other hand, it is possible that a party may receive a tax benefit when property is divided. In that case, the court may award him or her less property, since he or she has realized a benefit.
A prudent divorce attorney advises his or her client on any likely tax consequence from the equitable distribution of property. Moreover, in community property states some special considerations unique to these jurisdictions may apply.
Sometimes in order the pay a settlement, couples must disturb assets in a way that creates tax consequences. For example, taxes may result when a party must withdraw funds from a restricted account, such as a pension fund. The sale of assets received in a settlement, such as a house, may create a capital gains liability; in-kind distribution of property, such as set-off and trades; early withdrawals of pension funds -- all may have tax consequences that a court will consider.
In distributing property, courts consider the tax consequences when it can be demonstrated that the distribution creates a tax event and that the amount can be reasonably determined. In general, if the sale of an asset is not necessitated by the divorce and voluntary, tax consequences are not considered.
The burden of proof is with the party asserting that the consequences should be considered.