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The Divorce Encyclopedia

Term Definition Latent - concealed, hidden, such as a tax liability.
Application in Divorce In a divorce, one frequent area where a latent tax liability may come to the fore is the sale of the marital home after the divorce when the owner is now single, particularly when the gain exceeds $250,000. Suppose Rufus and Rhonda bought a house for $100,000 during happier times when they were first married in 1971. In 2000, after long and unhappy differences, Rufus and Rhonda parted ways, and their settlement gave Rhonda the house and Rufus got almost everything else. Rhonda thought she got a good deal, particularly since housing prices skyrocketed in the earlier part of the new century. Rhonda got a jolt when she sold the house in 2006 for $900,000 and discovered $550,000 of it were exposed to capital gains. Had Rufus and Rhonda sold the house as a married couple, they could have excluded $500,000 from capital gains.

Other assets containing latent tax liabilities are tax qualified IRAs, Keoghs, 401(k)s, 403(b)s, 457s as well as profit sharing plans, mutual fund shares, stocks and any investments that have appreciated over time.

See also Capital Gains.

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