What is one potential consequence of failing to properly account for passive activity losses in a divorce?

Failing to properly account for passive activity losses in a divorce can lead to increased tax liabilities for one or both parties involved. Passive activity losses generally occur when an individual has investment losses from activities in which they do not materially participate, such as rental properties or limited partnerships. These losses can offset other types of income, potentially reducing an individual's taxable income.

If these losses are not accurately considered during the divorce settlement, the financial implications can be significant. For instance, if one spouse retains an investment that carries passive activity losses but those losses are not identified or addressed in the divorce negotiations, they may not be able to utilize those losses to offset taxable income, resulting in a higher tax liability than expected. Properly documenting and incorporating passive activity losses into the financial settlement can lead to optimal tax efficiency for both parties, avoiding this adverse outcome.

While other options could potentially arise from poor divorce financial planning, they do not directly tie to the immediate tax ramifications that stem from mismanagement of passive activity losses.