No gain or loss is recognized when property is transferred between spouses during marriage. This rule applies also to transfers between former spouses if "incident to a divorce." A transfer is considered incident to divorce if it occurs within one year after a marriage ends, or is related to the ending of a marriage (i.e., occurs within 6 years after a marriage ends and the transfer is made under a divorce or separation agreement). A transfer that occurs later than 6 years after a marriage ends can be considered incident to divorce if the taxpayer can show that legal factors prevented earlier transfer of the property.

The basis of the property received in a transfer between spouses or former spouses is the adjusted basis the transferring spouse had in the property. In effect, the recipient spouse has received a gift of the transferred property. If that asset is later sold for a taxable gain, the recipient taxpayer will be liable for the entire gain. This is an often-overlooked ramification of a transfer. As an example, the taxpayer has a bank account worth $10,000 and stock worth $10,000 that was originally acquired for $4,000. If one spouse took the $10,000 bank account and the other the stock, that would not be an equal split since the one that took the stock would be responsible for the taxes on the $6,000 gain in the stock.

This is why it is so important to understand the tax implications associated with divisions and transfer of property incident to divorce. If this office can be of assistance, please call.