California’s community property system is meant to simplify property division issues in divorce cases by making it clear that all property gained through the efforts of either or both spouses during the marriage is to be split evenly between them. The reality, however, is that complicated issues still arise, including those related to property and income taxes. The state’s Fourth District Court of Appeals recently considered such a case.
Husband and Wife married in 1997 and had two daughters before separating nine years later. While their divorce case was pending, the couple entered into a “post nuptial agreement,” wherein they resolved various issues, including their rights to the family home in Southern California. They agreed to list the home for sale and to treat the proceeds as community property, except that Husband was entitled to an additional $2.5 million for separate property funds he had contributed to the residence.
The couple eventually sold the home in 2009 for $10 million. They used nearly $1.4 million from the proceeds to pay state and federal taxes on their estimated capital gains from the transaction. They evenly divided the remaining $3.5 million after covering the additional $2.5 million owed to Husband, as well as interest, fees, commissions, and closing costs. Husband and Wife filed separate 2009 tax returns, with each reporting $5 million in income from the sale of the family home. Husband was required to pay an additional $65,000 in estimated capital gains taxes, while Wife estimated a $475,000 refund because she included the $2.5 million separate property payment as part of her nontaxable basis for the property.
Husband later sought to get half of Wife’s tax return, arguing that it was part of the proceeds of the sale. A trial court disagreed, however, finding that Wife was entitled to any benefit from the “aggressive” tax return that she filed. It also said she would be responsible for any liability in the event that federal or state tax authorities decided that she owed them more cash.
The Fourth District later reversed the decision on appeal. The Court concluded that the tax refund was covered under Husband and Wife’s agreement as part of the proceeds of the sale. Even though the agreement didn’t specifically address this situation, the Court found that “the couple’s clear intent to equally divide the net sale proceeds after paying the taxes requires an equalization payment.”
Despite the ruling, the Court said it would delay ordering Wife to pay Husband half of the tax proceeds until the authorities reviewed Wife’s return and determined the final amount of her refund. “Accordingly, we remand for the trial court to determine what, if any, equalization payment is required based on the taxing authorities’ final tax determination,” the Court said.
Tax issues like this one are just some of the complicated matters that can arise in divorce cases. With offices throughout the Bay Area, California divorce lawyer Lorna Jaynes approaches divorce cases as a problem to be solved, not a battle to be won. She handles each case personally, taking the time to understand each individual client’s needs and interests and explaining the various options for resolving these matters. Call us at (510) 795-6304 or contact us online to set up an appointment.
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