If you’re thinking about divorce, saving taxes are probably the least of your concerns. However, addressing the tax implications of dividing property and structuring alimony may save you considerable financial grief in the future. Here are three common tax implications to keep in mind when speaking with your divorce attorney:

Property Transfers Incident To Divorce

Section 1041 of the Internal Revenue Code (“IRC”) addresses transfers of property between spouses or incident to a divorce. The general rule is that no gain or loss is recognized on a transfer of property from a spouse, or former spouse, if the transfer is “incident to (part of) a divorce.” A transfer of property is incident to divorce if the transfer occurs within one year after the date on which the marriage ceases. In Hawaii, this is almost always the date of filing of the Divorce Decree. The transfer is treated as a gift between the formerly married parties. The person who receives the property takes the value of the item they had before the transfer—including the taxes which might be due. It is critical that these rules be considered before you decide how to allocate valuable properties—because the tax bill will follow.

Sale Of A Principal Residence

Section 121 of the IRC excludes gain from the sale of a principal residence. Generally, you can avoid tax on the first $250,000 of gain on the sale of your primary home if you have owned the home and lived there at least two years out of the last five years. Married couples filing jointly can exclude a gain of up to $500,000 as long as either one has owned the residence, and both used it as a primary home for at least two out of the last five years. Divorcing couples should think both long term and short term on the ultimate division of the marital residence and be sure to take advantage of this substantial tax exclusion.

Alimony

Section 71 of the IRC addresses alimony and separate maintenance payments. Payments are included in the gross income of the receiving person (“payee”) and are presently deductible by the paying person (“payor”). A cash payment is considered “alimony” if: 1) it is received by a spouse (or former spouse), under a divorce decree or separation agreement; 2) the divorce decree or separation agreement does not designate such payment as not includable in the gross income of the payee and deductible by the payor; 3) the payee and payor spouse are not living in the same household; and 4) it is not payable after the death of the payee (recipient). The present ability to deduct alimony softens the financial burden on the payor and is often needed by the payee. However, this tax treatment of alimony will change on January 1, 2019. The new tax law will not affect divorces entered on December 31, 2018 or earlier. After that, spouses paying alimony can’t deduct it, but spouses receiving alimony will get the money tax-free. Some divorce lawyers are speculating that this change may make ending marriages even more drawn-out and expensive.