Tax Tips for Dividing Assets in a Michigan Divorce

 Posted on June 30, 2025 in Asset Division

Dividing property during divorce is not just about how the property is distributed. It also needs to be done while considering the tax implications of a proposed division. Because Michigan is an equitable distribution state, meaning assets are divided fairly but not necessarily equally, taxes can heavily influence how fair a settlement truly is. Understanding the tax implications of property division is essential for avoiding unexpected liabilities after your divorce is final. If you have questions about the specific tax implications of your divorce, a Northville, MI divorce attorney can help.

Is Property Division Taxable in Michigan?

Under 26 U.S. Code § 1041, transfers of property between divorced spouses are generally not recognized as a gain or loss for federal tax purposes. That means that you likely will not have to pay capital gains taxes or income taxes at the time of the transfer. However, that does not mean you will never be taxed. The spouse who receives an asset will inherit its original basis for capital gains purposes. Therefore, if you receive a rental property in the divorce and sell it later, you may owe capital gains tax on the full amount of appreciation, even if you did not originally buy the property.

Tax Considerations When Dividing Retirement Accounts

Retirement accounts are one of the most complex assets to divide without proper guidance. Regardless of the type of account, such as 401(k) or IRA, the tax consequences of its management vary depending on the method of transfer. For employer-sponsored plans like 401(k)s, a Qualified Domestic Relations Order (QDRO) is required to divide the account without triggering taxes or early withdrawal penalties under 26 U.S. Code § 414(p). If no QDRO is in place and a transfer is made, it can result in a significant tax hit.

Traditional IRAs do not require a QDRO but must still follow specific procedures for transfer. If funds are simply withdrawn and then given to a spouse, the IRS treats that as a distribution, and taxes – along with potential penalties – will apply.

Tax Strategies for Property Division To Discuss With Your Attorney

There are some practical ways to minimize tax surprises when dividing assets during your divorce:

• Consider the tax basis of assets: Pay attention to how much was originally paid for an asset because that number determines how much tax you may owe when the asset is sold or liquidated.

• Be strategic about who claims tax deductions: Determining who will claim tax deductions is especially important for mortgage interest and property taxes.

• Remember carryover losses: Carryover losses refer to the ability to carry a tax loss, like a capital loss, forward to future tax years. A carryover loss can reduce your taxable income, making it an asset.

• Look beyond the face value of assets: Include potential tax liabilities in the valuation of any asset you accept to have a better understanding of its total value.

These strategies can be complex and should be reviewed with a qualified financial advisor and legal counsel to make sure they apply to your specific situation.

Speak With a Novi, MI Divorce Attorney for a Free Consultation

Dividing property in a divorce can leave long-term financial scars if taxes are ignored. The goal is not just to walk away with assets. You want to protect your financial future, and the experienced Oakland County, MI divorce lawyers at Elkouri Heath, PLC can help. Together, we have been serving clients throughout southeastern Michigan for over 25 years. We understand that these cases carry heavy emotions, and we offer compassionate representation to ensure you feel safe and supported. Contact us at 248-344-9700 to schedule your free consultation today.