> ## Content Index
> Fetch the complete content index at: https://blog.denverdivorce.com/llms.txt
> Use this file to discover other available public pages before exploring further.

# Taxes on a Colorado Divorce Settlement: What Is and Is Not Taxed
- URL: https://blog.denverdivorce.com/divorce-settlement-taxes-colorado/
- Published: 2026-09-28T14:00:00.000Z
- Updated: 2026-09-28T14:00:00.000Z
- Description: A Colorado divorce settlement is rarely taxed when it is signed. The tax arrives later, and it lands on whoever took the low-basis assets. Here is how basis, the home sale exclusion, retirement transfers, maintenance, and the child tax credit actually work after a divorce.
- Author: Aaron Herzberg
- Tags: Tax, Property Division

Almost nothing in a Colorado divorce settlement is taxed on the day the decree enters. Property moves between spouses tax-free, retirement accounts can be split without a penalty, and for every divorce finalized since 2019 maintenance is neither a deduction nor income. That is the good news, and it is also the trap. The tax does not disappear; it rides along with the asset and comes due when the asset is sold or withdrawn.

So the real question is not whether the settlement is taxable. It is which spouse is carrying the built-in tax, and whether the balance sheet was adjusted for it before anyone signed.

## Property Transfers: No Tax Now, Carryover Basis Forever

Under I.R.C. § 1041, no gain or loss is recognized on a transfer of property between spouses, or between former spouses when the transfer is "incident to the divorce," meaning it happens within one year after the marriage ends or is related to the end of the marriage. The recipient takes the transferor's adjusted basis, and the gain that built up during the marriage stays inside the asset.

That is why $500,000 of stock is not worth $500,000 of cash. Suppose one spouse takes a brokerage account worth $500,000 with a cost basis of $150,000, and the other takes $500,000 in cash and home equity. The spouse with the stock owns a $350,000 unrealized gain. At a combined federal and Colorado rate of roughly 20 percent, that is about $70,000 of tax waiting to be triggered. The two "equal" halves differ by that amount.

Colorado judges have discretion to consider tax consequences, but only when the tax is likely to occur rather than hypothetical (*In re Marriage of Bayer*, 1984; *In re Marriage of Finer*, 1996). If nobody puts basis evidence in front of the court, the court divides at face value. The spouse who wants the tax counted has to prove it.

![The Federal Building and U.S. Custom House, Denver](https://storage.ghost.io/c/9c/7f/9c7f0f22-0ab1-4be3-88a9-68ce015e9524/content/images/2026/09/divorce-settlement-taxes-colorado.jpg)

The Federal Building and U.S. Custom House, Denver. Photo: Carol M. Highsmith, Library of Congress (public domain).

## The House and the Home Sale Exclusion

I.R.C. § 121 excludes up to $250,000 of gain on the sale of a principal residence, or $500,000 on a joint return, if the seller owned and used the home for at least two of the five years before the sale. In a Denver-area market where many couples bought a decade ago, the gain can exceed $250,000, and the difference between selling while married and selling after the decree is real money.

Two divorce-specific rules soften that. When a spouse receives the house in a § 1041 transfer, the other spouse's ownership period counts toward the two-year test. And a spouse who moves out but keeps an ownership interest is treated as still "using" the home while the other spouse occupies it under a divorce or separation instrument. That second rule is what makes a deferred sale for the children workable: the out-spouse keeps the exclusion for years, so long as the decree grants the in-spouse the right to occupy.

## Retirement Accounts: Three Transfers, Three Tax Rules

A 401(k) or private pension is divided by a qualified domestic relations order. The alternate payee's share is not taxed at transfer, and under I.R.C. § 72(t)(2)(C) a distribution to an alternate payee under a QDRO is exempt from the 10 percent early-withdrawal penalty, even if the recipient is under 59½. Income tax still applies, and a direct cash payout carries mandatory withholding, so the choice between rolling the share to an IRA and taking part of it in cash should be deliberate.

An IRA is not an ERISA plan and does not use a QDRO. Under I.R.C. § 408(d)(6), a transfer of an IRA interest to a former spouse under a divorce instrument is not taxable, and the transferred portion becomes the recipient's IRA. The custodian's own divorce transfer form usually does the job; Colorado PERA and other public plans likewise use their own order, with a 90-day filing deadline after the decree. What does not work is withdrawing the money and writing a check. In *Bunney v. Commissioner* (T.C. 2000) and *Jones v. Commissioner* (T.C. Memo 2000-219), husbands who did exactly that, under court orders, were taxed on the full withdrawal, and one paid the 10 percent penalty. The QDRO penalty exception does not apply to IRAs.

Pre-tax and Roth dollars are not equal. A $300,000 traditional 401(k) is worth perhaps $220,000 after tax to the person who eventually withdraws it. A $300,000 Roth is worth $300,000\. Trading one for the other at face value is a 25 percent mistake.

## Maintenance and Child Support

For any divorce or separation instrument executed after December 31, 2018, maintenance is not deductible by the payor and is not income to the recipient. That rule came from the 2017 federal tax act, it had no expiration date, and the 2025 federal tax legislation left it in place. Orders entered before 2019 keep the old deductible-and-taxable treatment unless they are modified and the modification expressly adopts the new rule.

Child support has never been deductible or taxable. Because neither payment now moves income between the parties for federal purposes, there is no longer a tax reason to label a property equalization as "maintenance." There are still reasons not to: maintenance is generally modifiable and ends at death or the recipient's remarriage under C.R.S. § 14-10-122, while a property judgment does neither.

## The Children on the Tax Return After HB25-1159

The federal personal exemption is zero and, under the 2025 tax legislation, permanently so. What still matters is who claims the child as a dependent, because that controls the child tax credit: $2,200 per qualifying child for 2025 and 2026, up to $1,700 of it refundable, phasing out above $200,000 of income for a single filer and $400,000 for a joint return. By default the parent with the child more than half the nights claims the child, and the other parent can claim only with a signed IRS Form 8332 release.

Colorado law on allocating that right changed in 2025\. HB25-1159 rewrote [C.R.S. § 14-10-115(12)](https://law.justia.com/codes/colorado/title-14/dissolution-of-marriage-parental-responsibilities/article-10/section-14-10-115/?ref=blog.denverdivorce.com). The old rule split the exemption in proportion to each parent's contribution to the children's costs. The new rule gives the court discretion, with findings if contested, based on each party's financial resources, the effect on a parent's ability to provide for the child, whether each parent would actually receive a tax benefit, and the effect on either parent's Affordable Care Act premium credit. The court can condition the right on staying current with child support, and a parent who claims a child in violation of the order, or refuses to sign the Form 8332, can be ordered to pay the lost tax benefit plus attorney fees. Head-of-household status is not affected by the allocation; it follows where the child lives.

## Filing Status in the Year of Divorce, and Equalizing After Tax

Marital status for the entire year is fixed on December 31\. A decree entered December 30 means both spouses file as single or head of household for that whole year; a decree entered January 2 means they file married, jointly or separately, for the year just ended. Joint filers are jointly and severally liable for the whole tax, though a Colorado court can allocate that liability between the parties in proportion to their income (*In re Marriage of Lafaye*, 2003).

The discipline that ties all of this together is after-tax equalization. Build the marital balance sheet, then tax-effect each asset at a realistic rate: zero for cash, the expected capital gains rate on the brokerage account, ordinary income rates on the traditional 401(k), nothing on the Roth, the § 121 exclusion on the house. Divide the after-tax numbers, or allocate the low-basis assets proportionally so both spouses carry the same embedded tax. It takes a spreadsheet and an afternoon, and it prevents the most common five-figure error in Colorado property divisions.

## Talk to a Denver Divorce Attorney About Settlement Taxes

Aaron Herzberg is a divorce attorney in Greenwood Village, Colorado, serving Denver and the Front Range, with more than 30 years of trial experience, a Georgetown Tax LL.M., and a practice focused on divorce, custody, and financially complex family law. Tax consequences are cheapest to fix before the settlement is signed, and nearly impossible to fix after. A first meeting is a paid consultation, not a free call and not a sales pitch.

Read the full guide on DenverDivorce.com: [Tax Strategy in a Colorado Divorce](https://denverdivorce.com/practice-areas/tax-strategy.html?ref=blog.denverdivorce.com).

*Educational information only, not legal advice. Reading this article does not create an attorney-client relationship.*