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Question: How do I enter a property settlement, and what is it?
Answer: You may enter a property settlement on the Client Info > Assets & debts screen, at the bottom.
A property settlement is an arrangement under which one spouse will pay another a fixed amount in the years immediately after the divorce.
This is typically done because there are not enough liquid assets to equalize the property division in the year of the divorce.
Property settlements do NOT appear on the state's financial form.
This is NOT where you divide assets between the parties. Do that on the Negotiation > Property Division screen.
Here are some key issues to consider in connection with property settlements:
- Property transferred is neither taxable to the recipient spouse, nor tax deductible to the payer spouse.
- For tax purposes, the payment will be considered as alimony or a taxable gift if the property transfer is not \"related to the ending of the marriage.
- Any payments made within six years after the date the marriage ends will be considered \"related to the ending of the marriage\" and will be treated as property settlements if the parties designate them as such.
- Property settlement payments made more than six years after the date the marriage ends might still be considered as \"related to the ending of the marriage,\" if the couple proves to the IRS that the payments were intended to be paid within the first six years, but were unavoidably delayed by business or legal factors.
- One way to think of property settlements is as a no-tax-effect alternative to spousal support.
Here are some tips to consider with respect to property settlements.
- The tax basis of any property transferred carries over to the recipient. If you are the payer, you want to use low-basis assets. An example might be a stock that has increased significantly in value since it was purchased.
- If you are the recipient spouse, you want to receive high-basis assets. This would be either cash, or even better, a stock that has declined in value since it was purchased.
- A property settlement can be useful if the payer spouse has assets that it will take time to liquidate, or expects to receive assets in future years.