Divorce can be difficult under any circumstances, but when significant wealth is involved, the stakes—and the complexity—rise considerably. In high-net-worth divorces, it’s not enough to simply divide assets equally; what truly matters is the after-tax value and future financial implications of those assets. Many individuals believe they’ve received a fair share when they walk away from settlements, only to later discover they left with an uneven and often disadvantageous portfolio due to overlooked tax consequences.

Landmines fill the landscape—some obvious, others deeply hidden—that can explode financially if you do not identify and address them during the divorce process. Below, we take a deeper look into some of the most common and costly tax traps in high-net-worth divorces and how to sidestep them.

Capital Gains Tax: Unequal Values Beneath the Surface

One of the most pervasive tax traps in divorce involves capital gains tax. While two assets may be equal in fair market value, their tax basis can vary dramatically. This is especially critical when dividing appreciated assets such as investment properties, stock portfolios, collectibles, or business interests.

Tax authorities assess capital gains tax on the increase in value from the original purchase price (known as cost basis) to the sale price. If a spouse receives an appreciated asset and later sells it, they could face a substantial tax bill.

Case Study

Consider this fictitious scenario: a divorcing couple owns two assets, each worth $1 million. One is a cash account, and the other is an investment property purchased for $300,000.

On the surface, both spouses appear to receive equal value. But the spouse who takes the property could face up to $166,600 in federal capital gains tax (assuming a 23.8% combined federal rate) if they sell, while the one who takes the cash owes nothing.

That disparity can widen further when you add state income taxes, depreciation recapture, or passive activity limitations. Proper due diligence—especially reviewing the cost basis and projected tax impact of each asset—is critical. Always consider the net value of an asset, not just the market value.

Property Transfers: Safe Harbor…With Caveats

Section 1041 of the Internal Revenue Code generally allows for tax-free property transfers between spouses or incident to divorce, but there are important conditions. First, you must make the transfer either within one year of the divorce or explicitly lay it out in the divorce or separation agreement. The IRS might treat transfers made outside this window or those that lack clear documentation as taxable events—potentially triggering gain recognition at the time of transfer.

Further complexity arises when the recipient spouse is a non-U.S. citizen. In these cases, the IRS does not recognize the same tax-free status, and property transfers may be subject to immediate tax consequences.

Additionally, certain types of assets—such as restricted stock units (RSUs), stock options, or partnership interests—can create murky tax waters due to vesting schedules, income attribution rules, and valuation issues. These situations require close coordination between the divorce attorney, CPA, and a financial advisor who understands how to model various outcomes.

Retirement Accounts: The QDRO Quagmire

Another highly sensitive area is the division of retirement accounts, which include 401(k)s, 403(b)s, pensions, and IRAs. Qualified plans such as 401(k)s require a QualifiedDomestic Relations Order (QDRO)—a special court order that allows the division of retirement assets between spouses without triggering early withdrawal penalties or taxes. Without a QDRO, the owner could face taxation and penalties as if they made a distribution when attempting to transfer funds to a non-owner spouse.

Importantly, QDROs must include precise information. They must clearly address details such as pre- and post-marital contributions, investment gains or losses, and survivor benefits. In some cases, a poorly worded QDRO can result in the loss of pension survivorship rights or unfair allocation of gains.

For IRAs and Roth IRAs, you don’t need a QDRO. However, you must still make transfers pursuant to a divorce decree or separation agreement. If you fail to structure the transfer correctly, the IRS may treat the transaction as a taxable distribution, subject to income tax and possibly early withdrawal penalties.

The Marital Home: A Capital Gains Trap in Disguise

The family home often carries emotional weight and financial significance, but it also comes with a tricky tax rule: the primary residence exclusion. Under current law, married couples can exclude up to $500,000 of capital gains on the sale of a home if they have lived in it for two out of the past five years.

Once divorced, that exclusion drops to $250,000 per person. Moreover, if only one spouse remains in the home, and the property doesn’t sell within three years of the move-out date, they may lose the exclusion altogether.

This becomes especially relevant in cases where one spouse “buys out” the other’s interest in the home and keeps it as a residence. If they later sell after the five-year window has passed, they could owe capital gains tax on any appreciation beyond $250,000, even if they originally planned to shield themselves under the higher joint exclusion.

To avoid this trap, divorcing couples should carefully consider whether to sell the home before finalizing the divorce or to structure ownership arrangements with tax efficiency in mind—such as including provisions that allow the non-resident spouse to maintain a partial exclusion under IRS rules.

Alimony and the TCJA Fallout

For decades, alimony (spousal support) was tax deductible for the payer and taxable to the recipient, which often created a more favorable outcome for high-income earners. However, under the Tax Cuts and Jobs Act (TCJA), that has changed.

For divorces finalized after January 1, 2019, alimony payments are no longer deductible to the payer nor considered taxable income to the recipient. While this simplified tax reporting, it also removed a key negotiating tool.

For high earners, losing the alimony deduction can significantly increase the effective cost of spousal support. A $100,000 annual payment that a tax deduction partially offset now comes directly out of after-tax income.

This new reality has shifted negotiations toward non-cash settlements, such as lump-sum payments or transfer of appreciated assets, which may offer more flexibility and less long-term tax impact.

Business Ownership: A Valuation and Tax Time Bomb

Businesses often represent the largest asset in a high-net-worth divorce—and the most complex. Business valuations must consider not only the company’s present value but also built-in capital gains, deferred compensation obligations, stockholder agreements, and future liquidity events such as a merger or IPO.

Failing to account for embedded tax liabilities—such as the capital gains tax on the sale of a business or depreciation recapture—can inflate the perceived value and result in an unequal division. A business owner who keeps the business may later owe millions in taxes that weren’t factored into the original settlement, while the other spouse walks away with liquid assets.

Adding to the complexity, C-corporations face double taxation—once at the corporate level and again at the shareholder level—which further reduces the net benefit of ownership. Using a Certified Divorce Financial Analyst® (CDFA) professional and a credentialed valuation expert can help assess the real, after-tax value of business interests and provide the framework for a fair distribution.

Overlooked Tax Assets and Liabilities

Beyond tangible assets, divorce proceedings often ignore hidden tax attributes. These include:

  • Net Operating Losses (NOLs): You can carry these losses forward to offset future income. If the divorce settlement doesn’t address them, they may be wasted.
  • Capital Loss Carryforwards: Useful for offsetting future capital gains, but only if properly allocated between spouses.
  • Charitable Contribution Carryforwards: Valuable for spouses who itemize deductions and donate regularly.
  • AMT (Alternative Minimum Tax) Credits: A complex but important factor for high earners who have been subject to AMT in prior years.

While these attributes may not appear on a typical marital balance sheet, they hold meaningful value and should serve as assets and divided equitably.

Final Thoughts: The Case for a Coordinated Team

In high-net-worth divorces, tax landmines lurk in almost every corner. From capital gains and basis traps to QDRO missteps and business valuation gaps, the consequences of poor planning can be staggering. What looks fair in a divorce settlement can prove to be lopsided—if not devastating—after you consider taxes.

We believe the best protection against these traps is a coordinated advisory team: an experienced divorce attorney, a CDFA®, a CPA with divorce tax expertise, and a financial planner who can model outcomes and plan for long-term wealth preservation. Together, this team can help spot hidden liabilities, strategize around tax law, and help both spouses transition from a place of uncertainty to financial clarity.

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your financial professional regarding your unique situation.

Author Michael J. Goldstein Financial Advisor CFP®, ChFC®, AAMS®, CDFA®

Mike has been involved in the financial services industry since 2001. He is a member of the Institute for Divorce Financial Analysts®, the Financial Planning Association, the Lake County Bar Association and the Lake County Estate Planning Council.

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