Loss Carryforwards: An Asset Often Overlooked in Divorce

When couples—and their attorneys—develop plans for the division of marital assets, they tend to focus on obvious assets such as real estate and retirement accounts. As a result, some valuable assets can be overlooked. Many people do not realize that their financial losses can be one such asset. It is important to understand the value of certain losses to ensure it is allocated properly to get your fair share in a property settlement.

Why a Loss is Valuable

The U.S. tax code allows taxpayers to carryover business or investment losses that affect them one year to offset taxable income in a future year. This is referred to as a “loss carryforward,” and it results in a tax savings that can add up to a significant amount.

For example, if your business had a net loss of $10,000 for the year or you sold stock at a loss of $10,000, you have the choice of using that loss to offset income for the year the loss occurred, or you can defer the ability to use the loss to offset income in a future year. At this point, the law allows losses to be carried forward indefinitely. The tax savings make the loss a valuable benefit that needs to be properly allocated in divorce.

Loss Carryforwards in Divorce

A loss that is incurred while a couple is married is likely to be considered marital property, and it should be distributed equitably between the spouses. If the loss stemmed from property that belongs solely to one spouse, that spouse’s attorney might be able to argue that the loss is separate property not subject to distribution, but since the loss accrued during the marriage, an argument could also be made that at least some of the loss should be distributed as marital property.

The distinction is often lost because many couples are so focused on current assets that they fail to consider tax implications or future interests of any kind. An experienced and meticulous attorney should be watching for this kind of issue to ensure that their client receives full value from the divorce settlement.  However, it is also important to work with an accountant when determining when and how to use or distribute a loss carryforward.

Future Assets are Often Overlooked

Loss carryforwards are just one example of assets that can be overlooked in negotiations for distribution of assets and debts in divorce. Other assets that can be used in the future, such as excess funds in a college savings plan, unused vacation or sick days, stock options, and restricted stock units, need to be inventoried and allocated properly to prevent one spouse from receiving an unintentional windfall.

It is important to work with an attorney who is prepared to leave no stone unturned when it comes to locating marital assets. Factors that you might not think of as an asset—including a net operating loss—can prove to have substantial value, and you deserve your fair share.