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Dividing investment accounts during divorce: unrealized gains

If you are considering divorce, property division will likely be on your mind. Perhaps you have been married many years and have a large amount of assets tied up in retirement and investment accounts. When you and your spouse are reviewing and negotiating your respective share of the marital estate, you need to be aware of unrealized gains on stock in your shared investment portfolio.

Property division that looks equal or equitable on paper may not be when it comes time to file taxes. The type of asset matters, and not all property receives similar treatment in the eyes of the tax code.

What is unrealized gain?

Unrealized gain is the difference between the amount you paid for the stock and its value at the present time. If the stock is worth more today than it was when you bought it, you have unrealized gain. The inverse is true for any stock that is worth less today than it was when it was purchased, which is called unrealized loss.  It is unrealized because you still hold the position in the security, it has not yet closed or been sold. The tax consequences are incurred when you sell or transfer the stock. Many investment professionals will value the worth of a portfolio based on the unrealized value.

You may be thinking that the solution is to have the market value when you enter property negotiations with your future ex-spouse. This is true. So, what is the problem? If the property allocation in your divorce awards you stock with unrealized gain, your total property settlement is less, because the tax consequences will eat up the value and cost you money.

What is the solution?

It for this reason that you need to be aware of how tax consequences impact property division in divorce. You should speak with a CPA or other tax professional to get a full picture of the risks and benefits in your investment portfolio. You may be able to offset gain and reduce capital gains tax using securities with unrealized loss. However, a tax professional will provide you with the full picture, thus you should be aware of it and keep it in mind during negotiations.

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Daprile-Bell Family Law Offices

Daprile-Bell Family Law Offices
1224 Lincoln Avenue
San Jose, CA 95125

Phone: 408-918-0920
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