Tennessee is one of the equitable distribution states, which means that a court has a great deal of leeway in deciding how marital assets are split. Most courts try to divide marital assets fairly, but judges can do nothing about the tax consequences of a divorce. In any such action, both federal and state tax rules apply to both spouses, meaning that couples may find themselves with certain tax consequences that they did not anticipate.
Federal tax rules indicate that most assets can be transferred without tax consequences as part of a divorce. However, the spouse who ends up with the asset will probably be responsible for the capital gains tax liability when the asset is sold. For example, if one spouse winds up with the marital home, he or she will probably have to pay capital gains tax on any appreciation in the home's value from the date of the transfer to the date of sale.
Tennessee may also have tax rules that apply to a particular situation when couples divorce, such as retirement accounts that are split, real estate that is divided and other assets that are considered either capital gains or non-capital gains. No matter what type of asset is in question, spouses must pay the entire amount of tax or face penalties.
A divorce attorney may be able to help a spouse understand the tax consequences of various decisions in a settlement agreement. As a result of negotiations, a couple may be able to reach an agreement that divides the assets fairly between the partners and gives each control over his or her own finances. A divorce attorney may also be able to help a spouse understand the implications of a court decision regarding division of assets.
Source: Market Watch, "What’s even worse than divorce? The taxes", Bill Bischoff, December 03, 2013