Dividing property during a divorce in Minnesota isn’t just about who gets what. The choices you make during property division can carry long-term tax implications that may impact your financial future well after the divorce is finalized.
Understanding these tax issues before finalizing your divorce decree can help you avoid surprises down the road. In this blog, we break down the most common tax concerns Minnesota couples face during property division—and how to protect yourself with the right legal and financial guidance.
Equitable Distribution and Taxes: What You Need to Know
Minnesota follows the principle of equitable distribution, meaning the court divides marital property in a way that is fair, though not always 50/50.
While the court looks at fairness, the IRS and Minnesota Department of Revenue look at tax consequences. That’s why property transfers between spouses during divorce require careful planning.
Does Property Division Trigger Tax?
Generally, no immediate taxes are due when property is transferred incident to divorce—but there are important exceptions and long-term implications.
According to the IRS, property transferred between spouses as part of a divorce settlement is non-taxable at the time of transfer. However, this doesn’t mean it’s tax-free forever. Future capital gains or income tax liabilities may still apply.
Capital Gains Tax and Real Estate
One of the biggest tax considerations is related to the marital home or other real estate.
Selling the House
If the marital home is sold as part of the divorce:
- Capital gains tax may apply if the home has appreciated significantly.
- Each spouse may be eligible for a $250,000 capital gains exclusion if they lived in the home for at least two of the past five years before the sale.
If the house is sold after the divorce and only one spouse is on the title, that person may lose access to the full exclusion.
Keeping the House
If one spouse keeps the house, they may eventually owe capital gains tax on its sale in the future. This future tax burden should be factored into the property settlement to ensure fairness.
Retirement Accounts and Tax Penalties
Retirement accounts like 401(k)s and IRAs are often major assets in a Minnesota divorce. However, they come with strict tax rules.
QDROs: Qualified Domestic Relations Orders
To divide a 401(k) or pension plan without early withdrawal penalties or taxes, you need a QDRO. This court order allows the tax-free transfer of a portion of the account to the other spouse.
Without a QDRO, the transfer may be taxed as a premature distribution and incur a 10% penalty.
IRAs
Transferring funds from an IRA does not require a QDRO, but the transfer must be done pursuant to a divorce decree. Improper handling can still lead to penalties.
Spousal Support vs. Property Settlement
In some cases, parties may agree to an unequal property split in exchange for no spousal support (alimony), or vice versa.
Be aware:
- Spousal maintenance is taxable to the recipient and deductible to the payer for divorces finalized before 2019.
- For divorces finalized after 2018, spousal support is not tax-deductible for the payer and not taxable to the recipient, under the federal Tax Cuts and Jobs Act.
Property settlements, however, are typically not taxable or deductible. That means the way you classify payments in your divorce decree can have serious tax consequences.
Hidden Tax Liabilities
Some assets may look equal on paper but carry hidden tax burdens:
| Asset | Tax Consideration |
| House | Capital gains when sold |
| Stocks | Capital gains on sale, based on cost basis |
| Retirement accounts | Income tax and early withdrawal penalties |
| Business assets | Depreciation recapture and ongoing liabilities |
| Savings account | No tax issues unless interest is earned |
When negotiating a fair split, these after-tax values should be taken into account.
Business Ownership and Depreciation
If one or both spouses own a business, the division of that business can trigger tax considerations such as:
- Depreciation recapture
- Capital gains on sale or transfer
- Future taxable income generated by the business
In high-asset divorces involving closely held businesses, it’s crucial to work with both a family law attorney and a CPA to evaluate the best approach.
Who Pays Property Taxes?
Property taxes are often addressed in the divorce decree, especially if one spouse keeps the home.
If you remain on the mortgage or title after transferring the home, you could still be legally liable for property taxes or mortgage payments. Be sure your name is removed from the title and mortgage as appropriate.
Reporting Requirements and IRS Forms
You may be required to file IRS Form 8332 if you’re the custodial parent releasing the right to claim your child as a dependent. Also, ensure all property transfers are properly documented in your divorce agreement to avoid confusion at tax time.
It’s a good idea to review your divorce decree with your tax professional before filing your next return.
How Martine Law Can Help
At Martine Law, we help clients in Minnesota navigate the complex tax implications of property division. Our legal team works closely with financial professionals to ensure your agreement is fair—not just today, but in the long run.
Whether you’re concerned about real estate, retirement accounts, or hidden liabilities, we make sure every detail is accounted for and your rights are fully protected.
Contact us today to schedule your consultation.