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What you need to know about 'liquidating' in a divorce

Sometimes, when it comes to dividing property and other assets in a divorce, it seems like a going out of business sale, where posters in the storefront blare, "Liquidation! Everything must go!"

You might think it's best to "liquidate" your Florida household - sell everything, split it and start over -- but it really isn't. That could be costly.

Let's start with liquidating a 401(k), which you might be tempted to do to pay expenses, to make a lump-sum payment to your spouse or to share it. If you do that, you'll wind up with a huge tax bill the following year that you just might not be able to pay, plus a penalty if you're under 59 ½. There are other ways to share retirement accounts that won't negatively impact your finances.

Liquidating a couple's assets generates the requirement to pay taxes. Therefore, it should be the last resort. It's preferable to transfer assets back and forth, kind of like properties on the Monopoly board.

One financial adviser offers this advice in "liquidating" property:

Do:

  • Learn as much as you can about your assets. How much did your home cost? What are the improvements worth that you made?
  • What would the capital gain be if you sold your home?
  • If you own a business, have it valued. How much are the building and real estate worth? How about your equipment? What would someone pay for your customer list?
  • Have anything you own of value, such as collectibles, art or jewelry appraised.

Don't:

  • Cash in your 401(k) unless absolutely necessary.
  • Sell something without getting market value or a fair price in return.
  • Forget that if you sell your house, the capital gains exclusion for each person is $250,000 when you split the sales price.
  • Forget to take other taxes into account.

This is just a snippet of what you must consider if you decide to sell all of your assets. You will want to call in a financial or tax adviser to give you information to make some of these decisions, and they will work in tandem with your divorce attorney to provide you with the best guidance possible.

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