The three main financial issues addressed in this study are:
- the division and equalization of marital assets
- issues surrounding the marital home
- capital loss carryovers
Bank accounts, Investments, and Retirement Accounts Divided
Martial Assets Excluding Marital Home
Marital assets should be divided 50/50 and equalized based on tax ramifications. Account values will fluctuate based on market performance as of the final date of valuation. However, for this exercise, we use the values based on statements furnished by Jane and Joe.
In banking, brokerage, and bank accounts whether titled in one spouse’s name or jointly titled, Jane and Joe own assets valued at $137,206. Split 50/50, the marital share for each is $68,603.
In retirement, tax-advantaged accounts, the cumulative value of Jane’s two retirement accounts are worth $280,431. The cumulative value for Joe’s five retirement accounts is $235,591, which includes the reduction of $32,946 from Joe’s IRA account, representing the pre-marital value, as well a reduction from the other Roth IRA account in the amount of $8,881, which is the pre-marital value for this account.
Therefore, in retirement plan assets, Jane has $44,840 more than Joe. However, this difference should be reduced by Joe’s Roth IRA in the amount of $2,666, which shall remain with him and also is distributed completely tax-free.
Pertaining to retirement accounts, in conclusion, the net difference in retirement account assets between the two is $42,174 in favor of Jane.
Jane shall either transfer half of $42,174, or $21,087 from her retirement account into Joe’s retirement account, thereby effectively resulting in each having $259,344 in qualified retirement savings, or alternatively, Jane could equalize the $21,087 through a transference of her share of the non-retirement funds at a rate equivalent to the retirement plan being adjusted lower by an extremely conservative tax rate of 11%, resulting in an exchange from Jane to Joe of non-retirement account funds in the amount of $18,767. Effectuating this alternative would leave Jane with $49,836 in non-retirement assets ($68,603-$18,767) and Joe with $87,370 in non-retirement assets ($68,603+ 18,767).
Splitting the Primary Residence
What to do with the Marital Home
The marital home currently has a net value, excluding sales and closing costs of $1,144,000.
Because we are approaching the fourth anniversary since Jane changed her primary residence away from the marital home and did so in the absence of a marital agreement, if the home were sold now, Jane would not satisfy the 24 months out of 60 months use and occupancy of the premises in order to qualify for any capital gains tax preferential treatment in terms of recording her share of the proceeds.
However, if Joe is granted use of the house under a divorce instrument, his use of the property as his primary residence during the occupancy period granted by the instrument is imputed to Jane. Therefore, a marital settlement agreement should require Joe to retain the marital home as his primary residence for at least 24 months after the execution of a marital settlement agreement before listing the property for sale or himself purchasing.
He shall maintain all regular and routine expenses associated with maintaining the home, and any extraordinary household expense incurred during his use and occupancy period should be shared equally. Title to the property during Joe’s use and occupancy period shall remain as tenants by the entireties. After the set use and occupancy period, Joe will either buy out Jane’s agreed upon 50% net equity share or the property will be listed for sale.
In any event, after Joe’s use and occupancy period has expired, Jane will be removed from the deed and mortgage. Imputing Joe’s use and occupancy post an executed divorce instrument should enable Jane to exclude $250,000 from her share of the capital gain and will allow Joe to claim the same.
During the use and occupancy period, Joe shall be entitled to claim all tax deductions associated with ownership of the house. If during the use and occupancy period, Joe is delinquent in terms of mortgage payments and Jane cures any deficiency, then she will be credited this amount first from the home sale proceeds before any further division or equalization is apportioned.
Who Takes On the Capital Losses?
The long term capital loss incurred during a year in which Jane and Joe filed jointly can be now be carried forward indefinitely by either or both parties. The current unused loss carryforward is approximately $383,000.
Beginning in the 2023 tax year the unused loss will be divided 50/50 such that each can utilize approximately $191,000 into the future.