Tax Planning During Divorce

In cases of divorce, numerous tax-related issues arise during the separation, such as:

1. When can the tax files of both spouses be separated?
2. What is the implication of a tax debt incurred while the couple was together but is demanded by the tax authority after the separation?
3. What is the significance of a capital declaration when the previous declaration was required while the couple was married?
4. What is the implication of evidence presented in the legal proceedings related to the spouses’ incomes? How does this affect the tax liability?
5. What authority does the tax authority have to demand documents and data related to the legal process in the Family Court? Is there confidentiality related to the fact that the discussions are held behind closed doors?
6. What is the significance of betterment tax and purchase tax in the separation of the marital home following a divorce?

The tax implications concerning real estate following a divorce

Simple and proactive tax planning can prevent long-term economic damage and save both parties a significant amount of money and frustration.

The most pressing issue that requires tax planning during a divorce is the regulation of the real estate of the divorcing couple. Section 4A of the Real Estate Taxation Law states that any division of real estate and property between spouses in a sale or transfer is not considered a taxable event and is exempt from reporting to the tax assessor. Therefore, such a division will not be subject to betterment tax and purchase tax.

So, where might a tax issue arise?

The problem may occur in the form of betterment tax that one spouse who received or purchased part of the property owned by both spouses might pay. After the 2014 reform, the conditions for exemption from betterment tax became much stricter. Assuming that in the future, that party wishes to sell the property, they will not be exempt from betterment tax – they will also not be able to deduct the cost of purchasing the apartment as an expense for their spouse’s portion. If the parties had refrained from utilizing the exemption during the division, they might have had another tax exemption they could have utilized instead, preventing the problem.

Here, it is essential to emphasize the importance of a tax professional – a tax advisor or accountant.

Additionally, we encounter cases where, in the division of property during divorce proceedings, the parties chose the division according to the value of the property without considering differences in the tax burden. However, when it comes to a completely different tax rate, the division is often unfair and far from the parties’ intent.

Separation of Tax Files in Divorce Proceedings

Section 1 of the Income Tax Ordinance defines a spouse as “a married person living and maintaining a common household with the person to whom they are married.” This means two cumulative conditions are required to be defined as a spouse under the ordinance:

• The couple must be married.
• They must maintain a common household.

Thus, the separation date between the couple is relevant for tax purposes if there is evidence that the couple did not maintain a common household. Generally, the rationale is that any debt or liability that one spouse had while they were spouses as defined in the ordinance applies to both spouses (except in criminal matters). It is advisable to request the separation of files at the tax authority as early as possible to minimize tax exposures and prevent distress. Need tax advice?

Discussions with Tax Authorities in Divorce Proceedings

In any discussion, the tax authority has the right to demand pleadings related to the process, even if it is confidential and held behind closed doors. Many cases in the tax authority start from a report by one spouse about the financial conduct of the other spouse, which certainly facilitates the tax authority’s audits. During the balancing of resources, future tax liabilities or future tax refunds, tax on unrealized gains, and more must be considered. Therefore, it is advisable to consult tax planning experts as soon as possible when reaching a divorce settlement.

Tax Arbitration in Divorce Proceedings

Family lawyers often recommend that spouses turn to arbitration solely in tax matters when settling issues between them. This process has many advantages – it is confidential and allows disputes to be resolved professionally and fairly. Our office conducts such arbitrations, which simplify and reduce costs in the property division process between the spouses.

Our office accompanies divorce proceedings in collaboration with family law attorneys and helps reduce tax payments and future tax exposures.