Divorce and The Capital Loss Carry-Forward

Due to turmoil in the stock market during 2008, as well as 2000 through 2002, many married couples may have incurred losses on the sale of their stocks. Due to limitations within the Internal Revenue Code, capital losses in excess of capital gains plus $3,000 result in a capital loss carry-forward which can be used to offset future capital gains. When married couples get divorced, the capital loss carry-forward is an often overlooked asset within the marital estate.

One question that should arise when dividing the marital estate is how to divide the capital loss carry-forward. The answer is, as with most things in litigation, it depends. What it depends on is how the capital loss was originally generated.

For example, if the capital asset which generated the capital loss carry-forward was a separate asset owned by the husband, then the capital loss carry-forward should be allocated to the husband. Likewise, if the capital asset which generated the capital loss carry-forward was a jointly owned asset, then the capital loss carry-forward should be split between the husband and wife. The allocation of the capital asset carry-forward is a bit more complicated when there have been capital losses generated for multiple tax years and when the ownership of the capital assets generating the capital loss carry-forward has been mixed (marital vs. separate).