Transfer of Property between Spouses
In general, if you transfer property to or receive property from your spouse, no gain or loss is recognized. This rule applies even if the transfer is made to a trust for the benefit of your spouse or to a former spouse if it was incident to a divorce. The Internal Revenue Code defines a transfer as “incident to a divorce” if the transfer occurs within one year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage.
A transfer that qualifies for this tax-free treatment is treated as a gift. Neither the transferor nor the transferee recognizes any gain or loss as a result of the transaction. However, the transferee takes the transferor’s basis in the property even if that basis exceeds the value of the property at the time of the transfer.
The nonrecognition rule does not apply to income that is ordinarily recognized when that income is transferred to another taxpayer. Therefore, if you transfer certain U.S. savings bonds to a spouse or former spouse incident to a divorce, you as the transferor must include in income in the year of the transfer any deferred accrued interest on the bonds. The recipient takes the your basis increased by the amount included in your income.
However, this general nonrecognition rule does not apply in all situations. A gain or loss on the transfer of property between spouses will be recognized:
- When the recipient spouse or former spouse is a nonresident alien.
- When the property is transferred in trust and the amount of the liabilities assumed by the trust plus any liabilities on the property exceed the adjusted basis of the property. In that case, a gain must recognized.
- When an installment obligation is transferred in trust.
- When stock is redeemed and the redemption is taxable to a spouse under a tax law, a divorce or separation agreement, or under a valid written agreement.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.