The money that moves in a divorce: division of marital property, consolation money, and child support. The answer to the worry "Will tax be charged?" is: "The receiving side is in principle not taxed. However, there are three major exceptions." In particular, "capital gains tax on the side that hands over the house" is the biggest pitfall — proceed with a divorce without knowing it, and a bill for several million yen can arrive later. This article organizes the taxes by type of money, along with the timing and steps that avoid losses.
① Division of marital property, consolation money, and child support are in principle not taxed on the receiving side (because they are payments based on a right, not gifts)[National Tax Agency No.4414 (in Japanese)].
② Exception 1: Capital gains tax is charged on the side that "hands over" a house or land in the division of property (it is deemed to have been sold at market value)[National Tax Agency No.3114 (in Japanese)]. For your own home, the ¥30 million deduction can be used, but only if the division is "after the divorce is finalized."
③ Exception 2: A lump-sum payment of child support risks gift tax to the extent it exceeds the scope of ordinary support.
④ Exception 3: A portion of the division that is excessive, or a sham divorce for the purpose of tax avoidance, incurs gift tax.
⑤ After a divorce there are reductions such as the ¥350,000 single-parent deduction. Note that the situation is judged as of December 31, so if you divorce within the year you cannot use the spouse deduction for that year.
Quick reference table of taxes by type of money
| Money | Receiving side | Handing-over side |
|---|---|---|
| Division of property (cash / deposits) | Non-taxable (excluding any excessive portion) | Not taxed |
| Division of property (house, land, stocks, etc.) | Non-taxable (the acquisition cost becomes the market value at the time of division) | Capital gains tax may be charged ★the biggest pitfall |
| Consolation money | Non-taxable (compensation for mental damage) | Not taxed (and not deductible as an expense either) |
| Child support (monthly payments) | Non-taxable (performance of the support obligation) | Not taxed |
| Child support (lump-sum payment) | Gift tax risk if it exceeds the ordinary scope | — |
| Pension splitting (Type-3 splitting / agreed splitting) | Not taxed at the time of splitting (taxed when received as a future pension) | — |
The biggest pitfall: capital gains tax on the "side handing over the house"
When you transfer the title of real estate to the other party in a division of property, under tax law it is treated as "having transferred that real estate at the market value at the time of division"[National Tax Agency No.3114 (in Japanese)]. If it has appreciated since purchase, capital gains tax is charged on the side that handed it over (often the husband).
- Example: a home bought for ¥30 million has a market value of ¥45 million at the time of division → the ¥15 million appreciation gain becomes taxable on the handing-over side.
- Relief measure: the ¥30 million special deduction for your own home. However, this special provision cannot be used for a transfer to a spouse, so the order of dividing (transferring title) "after the divorce is finalized" is decisively important (details of the ¥30 million deduction). If you change the title in the division of property before the divorce, the special provision cannot be used and the whole amount may be taxed.
- If a mortgage loan remains, be sure to consult a professional (tax accountant / lawyer) before transferring title, including the handling of assuming the loan and joint guarantees (the divorce risk of a pair loan).
Child support: monthly is non-taxable, lump-sum needs care
- Child support is the performance of a support obligation, so amounts paid "as needed, each time" are non-taxable.
- If you receive future amounts in a lump sum, gift tax may be charged on the portion that exceeds the scope of ordinarily necessary living and education costs. If there are circumstances that make a lump sum desirable, consult a professional, including the use of a trust or the design of a notarized deed.
- A parent paying child support may be able to make a child living separately the subject of the dependent deduction (age 16 or over, ¥380,000 and up) (because they are recognized as "sharing living expenses"). However, only one of the former spouses can do so, and duplicate declarations will be denied, so make an arrangement in advance. Even under age 16, it affects the judgment of residence tax exemption.
Taxes that change with the "timing" of the divorce
- The spouse deduction and special spouse deduction are judged by the situation on December 31. If the divorce is finalized within the year, you cannot use the full year's worth for that year. Considering the tax effect of the deduction (¥380,000), simply submitting a year-end divorce notification in January can change the amount by tens of thousands of yen (of course, this is not something to decide by tax alone).
- Conversely, a single parent after divorce can newly use the "¥350,000 single-parent deduction" (income of ¥5 million or less, a child who shares living expenses). See the widow deduction and the details of the four deductions.
- Because the child-rearing allowance and municipal subsidies are judged by the prior year's income, it is reassuring that the division of property and consolation money (non-taxable = not counted as income) do not affect them.
- For a marriage of 20 years or more, there is also the option of handing over the house before divorce with the "spousal gift for a devoted couple" (the ¥20 million spouse deduction for residential real estate) (compare this with a post-divorce division of property together with a professional).
FAQ
Is money received in a division of marital property taxed?
In principle it is not. This is because it is not a gift but a payment based on a right — the settling of marital property and a guarantee of livelihood. However, gift tax is charged on any portion that is excessive in light of the property built through the couple's cooperation, or when the divorce is recognized as being for the purpose of tax avoidance.
I heard that dividing a house incurs tax. Is it the receiving side?
The one charged is the "handing-over side." It is deemed to have been transferred at the market value at the time of division, and capital gains tax is charged on the appreciation gain. In many cases the ¥30 million special deduction for your own home can bring it to zero, but because it cannot be used for a transfer to a spouse, the order of transferring title after the divorce is finalized is important.
Is gift tax charged if I receive child support in a lump sum?
There is a risk. Child support is non-taxable if paid "as needed, each time," but a lump-sum receipt of future amounts risks having the portion beyond the ordinarily necessary scope treated as a gift. If the amount is large, consult a professional about how to design the way it is received.
Which is more advantageous for tax, divorcing within the year or after the new year?
Because the spouse deduction and the like are judged by the marriage as of December 31, for the side that has a lower-income spouse in the deduction, a divorce finalized after the new year (in January) secures the deduction for the prior year. On the other hand, after a divorce the single-parent deduction (¥350,000) may be available, so it becomes a comparison across the whole household.
Data sources
- Division of property and gift tax (in principle non-taxable; exceptions such as the excessive portion): National Tax Agency No.4414 When you receive property in a divorce (in Japanese)
- Capital gains for the side that handed over real estate: National Tax Agency No.3114 When you hand over land and buildings in a divorce (in Japanese)
- Single-parent deduction: National Tax Agency No.1171 (in Japanese) / Living expenses from a support obligor (non-taxable): National Tax Agency No.4405 (in Japanese)
* This article is general information; please consult a lawyer for negotiating divorce terms and legal advice, and a tax accountant or tax office for individual judgments on tax amounts.