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Divorce and Tax or Taxation Consequences

Divorce is a Taxing Time, but Don’t Forget the Tax Consequences of Marital Real Property (Like a Family Farm)

As domestic advocates, we at Ciyou & Dixon, P.C. find our jobs difficult in most every case to help our clients make very important custody and property (assets and liability) decisions (objectives of the litigation) while addressing significant emotional turmoil typically associated with divorce. And we only have to help one side through this time period.

When the emotion of both parties combines, and there are two (2) sides to custody and property issues, this is where Indiana’s mediators and judges come in. They have very difficult jobs balancing these positions to either help the parties reach common ground (a mediated agreement for division of property - Indiana Code § 31-15-7-4 ) or decide the case where there is no other option (judges).

In this caustic mix, litigants are often hesitant to add costs or delay or provide anything that might be perceived as, also beneficial for the soon-to-be ex-spouse. One situation where this can cause a great deal of problem and/or financial consequences after the fact is with valuable real property that has significant market value (not negative equity like many marital homes are at the present time) and may have grown over the amount paid for it initially.

A good example in Indiana is with the family farm. Tillable ground has remained stable or grown in value, despite the collapse within other segments of the residential housing market and commercial real estate. In some cases, farm ground is increasing drastically throughout the Midwest. A lot of this has to do with climate change and the fact the world population has passed the 7 billion mark.

An appealing way for litigants to seek to divide a farm is to have it valued, subtract what is owed, and order the other spouse to pay one-half of the value (assuming an equal division of the marital estate). This presupposes the spouse keeping the property has strong enough credit to get this accomplished and the crop farming operation can sustain the debt service.

Where the parties and court do not consider tax consequences, it can radically alter the apparent equal division. This is the reason the Indiana Divorce Act contains language directing the court to consider the tax consequences of its property division (Indiana Code § 31-15-7-7 ). However, the emotional, financial costs, and otherwise often result in litigants not thinking this situation through and not presenting alternate evidence if the trial court decides to do “X”, “Y” or “Z” as it relates to the farm (this example).

Putting on such evidence, however, is the litigant’s burden; the trial court does not and cannot do this for a party. This division is final and generally not subject to re-consideration (Indiana Code § 31-15-7-9.1).

As such, if the farm ground cannot be refinanced, and a spouse is ordered to receive ½ of its appraised value, minus existing debt service, the farm land will have to be sold (or apportioned if that was tried to the court). However, for any amount that this farm has appreciated or increased in value, there will be short- or long-term capital gains tax to be paid.

Assuming a long-term capital gain, which is presently taxed by the IRS at 15%, it takes more than a dollar received in the sale to equate or net $1.00 to pay the other spouse the fixed or sum-certain amount ordered by the trial court. Not considering other selling costs, such as real-estate commission, surveys, soil sampling, each dollar received is only $.85 cents after it is taxed.

For this reason, those sometimes expensive experts (tax) your counsel might be advocating to testify at trial are probably a necessity to minimize the downside if a farm or like parcel or real property cannot be cashed out to satisfy the sum ordered to the other spouse.

If this blog post has helped you realize the potential need for other experts to be involved in your case and why this benefits your position, it has you thinking in ways that are helpful to your advocate.

This blog post is in no way intended to provide tax advice. Instead it is aimed at making more educated litigants, under the assumption this allows for better advocacy and decision-making by trial courts. This blog post is written by attorney Bryan L. Ciyou, Ciyou & Dixon, P.C. The firm practices throughout the state of Indiana.

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Ciyou & Dixon, P.C., is a law firm located in Indianapolis, Indiana. We serve clients in six core practice areas: family lawappellate practicefirearms lawgeneral practicepersonal injury and criminal law.

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Based in Indianapolis and founded in 1995, Ciyou & Dixon, P.C. is a niche law firm focused on successfully dealing with the complexities of divorce, high-conflict child custody and family law. Known for their ability to solve extremely complex situations with high quality work and responsiveness, Ciyou & Dixon will guide you every step of the way. The family law attorneys at Ciyou & Dixon, P.C. will help you precisely identify your objectives and the means to reach your desired result. In addition, this practice focus is augmented by the firm's other three core areas, namely appellate advocacy, civil practice, and firearms law. Life is uncertain. Be certain of your counselSM.

Indianapolis Divorce Attorneys, Ciyou & Dixon, P.C. of Indianapolis, Indiana, offers legal services for Indianapolis, Zionsville, Noblesville, Carmel, Avon, Anderson, Danville, Greenwood, Brownsburg, Geist, Fortville, McCordsville, Muncie, Greenfield, Westfield, Fort Wayne, Fishers, Bloomington, Lafayette, Marion County, Hamilton County, Hendricks County, Allen County, Delaware County, Morgan County, Hendricks County, Boone County, Vigo County, Johnson County, Hancock County, and Tippecanoe County, Indiana.