Who pays the capital gains tax when selling property after separation?
By Matthew Katsionis, Vancouver Family Lawyer, Calgary Family Lawyer
In family law, capital gains can arise when dividing family property. They are often overlooked by family lawyers in the division of family property and therefore can be a hidden liability that only becomes known after a separation agreement has been signed. Unfortunately, if a capital gain is not accounted for in the division of family assets in a binding separation agreement, someone may be getting a bad deal.
Capital gains apply to any investment, or property that has increased in value since purchase. This includes the family home, stocks or a rental property. The amount of the increase in value of the asset that attracts capital gains varies depending on the asset, but one thing is true, the seller will have to pay for it.
Scenario 1: If the Rental Property is Not Being Sold Immediately
After separation or divorce, the division of family property can be a creative process where the assets and debts are divided and allocated between the parties in a variety of ways so that the total assets are equal. Sometimes this involves one spouse getting the family home, while the other gets the rental property.
When one spouse keeps the family home while the other keeps the rental property, it is clear that the spouse with the rental property will have a larger future tax burden from capital gains tax. When all assets can be equalized now, who gets stuck with the capital gains tax?
The answer in family law is well settled law in British Columbia. In order for both spouses to be equally responsible for the capital gains tax, the spouse who is keeping the property that will be subject to a future capital gains tax must show:
A clear intent to sell the property in the near future;
That they have taken steps taken to have the property sold such as obtaining a realtor;
A timeframe in which the property will be listed for sale and/or completion of sale (depending on the circumstances).
If the spouse with the future capital gains tax is able to show the above, especially a timeframe, then the other spouse will have to share in the capital gains tax at the time the family property is equalized. This could be affected by an exchange of family assets to account for 50% of the future capital gains tax.
If the idea of the rental property being sold is merely speculative and it is a mere future possibility then a judge would likely not order the sharing of the future capital gains tax. The law is clear, latent capital gains are not to be the responsibility of the spouse who does not receive the rental property.
If you are negotiating a position where you receive a rental property, you need to make a determination as to whether you are going to keep it indefinitely or sell it upon transfer. This makes the difference when addressing the capital gains issue.
If you plan to move into the rental property you are changing that into your primary residence which will change the amount of capital gains payable.
Consult your accountant to understand exactly how much capital gains tax is at stake in your divorce settlement.
Make sure you ask your family lawyer about the tax implications of your settlement.
The top-rated Vancouver family lawyers at Crossroads law have successfully negotiated many high net worth family property divisions. Many times, this includes unpaid tax debts and capital gains taxes. Contact us now to book your free consultation.