Taxes on divorce-settlement assets

Dear Tax Talk,
My husband divorced me last year. As part of my settlement, I received half of his 401(k) and pension plans, half of the equity of our house, and half of our investment portfolio. However, in actuality he kept the house, and instead of cashing out my share of the home equity, he sneakily gave me a larger share of the personal investment account. In order for me to buy a house this last spring, I had to cash out the personal investment account. Where does this leave me come tax time? -- Jonell

Dear Jonell,
Your clever, sneaky ex has given you the gift of a hidden tax liability. It also sounds like your divorce attorney was asleep at the wheel.

If I understand correctly, your ex-husband gave you the value of the equity in your home by giving you appreciated investments. For example, if your ex owed you $20,000 for your equity in the home, he gave you stock worth $20,000. Assuming this stock has an actual cost of less than $20,000, you will owe capital gains tax on the appreciation since you sold it to buy your home. Alternatively, if you had sold the home, you probably wouldn't have had to pay tax as long as you owned it and lived in it for two years. This, of course, is what makes your ex-husband sneaky.

The good news is that the holding period for the stock carries over from when you and/or your husband acquired the investments during your marriage. In other words, your divorce date is not considered the date you acquired the stock. Rather, for tax purposes the date is when you originally acquired the investments during your marriage. This is important for purposes of calculating long-term capital gains, which are taxed at a lower rate. The long-term rate was cut to 15 percent for sales after May 6, 2003. If you sold the stocks on or before that date, you must pay 20 percent.

You might also want to look at your last joint tax return to see if you have any unused capital loss carryovers that can offset the gain from the sale. If there are losses available on that return, consult your divorce attorney or other qualified professional to determine if you're entitled to claim them on your 2003 tax return.