Nolo's Essential Guide to Divorce - Emily Doskow [119]
For example, say you are buying out your spouse's share of the house. You've agreed that the total equity is $80,000 (the market value is $260,000 and your mortgage loan balance is $180,000). You owe your spouse $40,000. And let's say your joint debts total $12,000. You're getting a new mortgage loan that will allow you to take out the cash you need to pay off your spouse, so you get a loan for the amount of the original mortgage, plus $46,000. You pay off the mortgage, pay your spouse $34,000, and use the remaining $12,000 to pay off the debts. Result: you each paid an equal share.
Another option is to keep sharing responsibility for debts after your divorce, but it entails certain hazards. For example, if you and your spouse agree that you'll each pay half of the monthly amount due on a joint credit card you used during your marriage, and then your spouse doesn't make the payments, it will affect your credit history (and your credit card balance).
If you do agree to share responsibility for your marital debts, make sure you get an "indemnity agreement" from your spouse, either in your marital settlement agreement or a separate document. The agreement should state that if either of you doesn't live up to agreements about paying debts, the other can go into court to get repaid. Going to court would be a big hassle, but having that option is better than just hoping everything will work out.
Even if your spouse agrees to take on a debt, if it has your name on it or even if you were married when it was incurred, the creditor can still come after you for payment if your spouse defaults. In short, your settlement agreement isn't binding on Visa. So if your spouse agrees to accept as separate debt $5,000 in credit card charges made during the marriage, and is also receiving a distribution of $30,000 from a brokerage account, arrange for the brokerage firm to issue two checks: one for $5,000 made out to the credit card company, and one for $25,000 made out to your spouse.
Dealing With Debt: Assessing Your Options
Handling Separate Debts
If you get a ruling from a court-or an agreement from your chastened spouse-that your spouse will pay for debts incurred for his or her sole benefit, make sure that these separate debts are paid when assets are distributed to each of you-which is likely to he around the time that you submit your final settlement agreement and judgment papers to the court at the end of your divorce process.
Tax Consequences of How You Divide Property
Many of the transactions that go along with divorce, like transferring property from one spouse to another, are tax-neutral events. In other words, neither of you will owe any tax (or get any tax benefit) as a result. Transfers between spouses generally are exempt from income, gift, and capital gains tax anyway, and transfers related to a divorce are included in that rule. So, for example, if you own a house, but it ends up with your former spouse when you divvy up all your property, your spouse won't have to pay income tax or capital gains tax relating to the transfer, and you won't have to give a thought to gift tax. The tax basis (the value of the property for tax purposes) of the home won't change. Nor will the property taxes increase for the spouse who is keeping the home. (Of course, if you sell your house to someone else, capital gains tax will apply. See "Your House and Capital Gains Tax," below.)
There are, however, some tax issues you need to be aware of when you are negotiating your property division.
Same-sex couples need tax assistance. The federal tax laws that govern marital property don't apply to couples in same-sex relationships, including marriage in Massachusetts and civil unions or domestic partnerships in other states where they exist. How to file taxes and how to deal with property division are