Taxpayer asks:
Hi–
Was wondering if you could advise on what happens if a married couple has, say, a capital loss carryover, and the couple divorces. Do they just split the carryover down the middle? Can they negotiate the amount each takes? Does the carryover amount change with a filing status change?
Taxgirl says:
Divorce and tax can be tricky – and I highly recommend that you consult with a family law and tax professional – but here are the general rules:
If a married couple files separate returns, the loss follows the taxpayer who first reported the loss.
If a married couple files joint returns, the loss generally follows the taxpayer who made the investment that resulted in the loss. (See Reg. 1.1212-1(c))
Of course, as with any asset (and you can think of a loss carry forward as an asset since it produces a somewhat positive result in the offset of your future tax burden), a contract to divide assets differently would be enforceable. If there is a prenup or separation/divorce agreement in place that would affect the loss carry forward, the parties would allocate according to the agreement.
If the matter goes to court, the court may use its discretion to determine which taxpayer owned the investment – including the decision that the loss carry forward was marital property – but cannot allocate the loss carry forward contrary to tax law.
I hope that helps!
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
