Property Transfers Between Spouses

Are there are any special rules that apply to the taxation of property transfers between spouses?

There are special tax rules that apply to such property transfers depending on whether the transfer is between two spouses that are currently married or whether a transfer occurs between two spouses or former spouses incident to a divorce proceeding. If these spousal property transfer rules are not followed, there could be major tax problems down the road for both spouses.

 

No gain or loss will be recognized on any transfer of property between two spouses

The general rule is that no gain or loss will be recognized on any transfer of property between two spouses at any time during their marriage. This rule also applies when one spouse transfers property in trust for the benefit of the other spouse. This rule is not elective, meaning that it applies automatically. Likewise, the Tax Code imposes no gift tax on such transfers.

 

No Gain or Loss Between Spouses

In addition, there is a special tax rule that provides that no gain or loss is recognized when an individual transfers property to a spouse or former spouse incident to a divorce. This rule is meant to apply to property settlements incident to divorce and is also not elective. This rule applies regardless of whether the transfer of property is for the relinquishment of marital rights or the cancellation of indebtedness; it also applies regardless of whether the property transferred was owned separately or together during the marriage. An exception to this rule applies to treat a transfer of property in trust for a former spouse as a sale to the extent that the liabilities on the property exceed its basis.

 

Spousal Property Transfers in Divorce

Even though this rule provides that property transfers incident to divorce are not taxable, any payment that falls under the category of alimony is always taxable to the recipient spouse and always deductible to the spouse making the payment. Because of this rule making alimony taxable, it is important to make sure that property transfers that are really part of property settlement involved in a divorce do not have any of the characteristics that would make the IRS treat them as alimony.