Publication 504 |
2001 Tax Year |
Property Settlements
There is no recognized gain or loss on the transfer of property
between spouses, or between former spouses if the transfer is because
of a divorce. You may, however, have to report the transaction on a
gift tax return. See Gift Tax on Property Settlements,
later. If you sell property that you own jointly to split the
proceeds as part of your property settlement, see Sale of
Jointly-Owned Property, later.
Transfer Between Spouses
No gain or loss is recognized on a transfer of property from you to
(or in trust for the benefit of):
- Your spouse, or
- Your former spouse, but only if the transfer is incident to
your divorce.
This rule applies even if the transfer was in exchange for
cash, the release of marital rights, the assumption of liabilities, or
other considerations.
However, this rule does not apply if your spouse or former spouse
is a nonresident alien. Nor does it apply to certain transfers covered
under Transfers in trust, later.
The term "property" includes all property whether real or
personal, tangible or intangible, or separate or community. It
includes property acquired after the end of your marriage and
transferred to your former spouse. It does not include services.
Medical savings accounts (MSAs).
If you transfer your interest in an Archer MSA to your spouse or
former spouse under a divorce or separation instrument, it is not
considered a taxable transfer. After the transfer, the interest is
treated as your spouse's Archer MSA.
Incident to divorce.
A property transfer is incident to your divorce if the transfer:
- Occurs within one year after the date your marriage ends,
or
- Is related to the ending of your marriage.
A divorce, for this purpose, includes the ending of your
marriage by annulment or due to violations of state laws.
Related to the ending of marriage.
A property transfer is related to the ending of your marriage if
both the following conditions apply.
- The transfer is made under your original or modified divorce
or separation instrument.
- The transfer occurs within 6 years after the date your
marriage ends.
Unless these conditions are met, the transfer is presumed not to be
related to the ending of your marriage. However, this presumption will
not apply if you can show that the transfer was made to carry out the
division of property owned by you and your spouse at the time your
marriage ended. For example, the presumption will not apply if you can
show that the transfer was made more than 6 years after the end of
your marriage because of business or legal factors which prevented
earlier transfer of the property and the transfer was made promptly
after those factors were taken care of.
Transfers to third parties.
If you transfer property to a third party on behalf of your spouse
(or former spouse, if incident to your divorce), the transfer is
treated as two transfers.
- A transfer of the property from you to your spouse or former
spouse.
- An immediate transfer of the property from your spouse or
former spouse to the third party.
You do not recognize gain or loss on the first transfer.
Instead, your spouse or former spouse may have to recognize gain or
loss on the second transfer.
For this treatment to apply, the transfer from you to the third
party must be one of the following.
- Required by your divorce or separation instrument.
- Requested in writing by your spouse or former spouse.
- Consented to in writing by your spouse or former spouse. The
consent must state that both you and your spouse or former spouse
intend the transfer to be treated as a transfer from you to your
spouse or former spouse subject to the rules of section 1041 of the
Internal Revenue Code. You must receive the consent before filing your
tax return for the year you transfer the property.
Transfers in trust.
If you make a transfer of property in trust for the benefit of your
spouse (or former spouse, if incident to your divorce), you generally
do not recognize any gain or loss.
However, you must recognize gain or loss if, incident to your
divorce, you transfer an installment obligation in trust for the
benefit of your former spouse. For information on the disposition of
an installment obligation, see Publication 537,
Installment
Sales.
You also must recognize gain on the transfer of property in trust
in the amount by which the liabilities assumed by the trust, plus the
liabilities to which the property is subject, exceed the total of your
adjusted basis in the transferred property.
Example.
You own property with a fair market value of $10,000 and an
adjusted basis of $1,000. The trust did not assume any liabilities.
The property is subject to a $5,000 liability. Your recognized gain on
the transfer of the property in trust for the benefit of your spouse
is $4,000 ($5,000 - $1,000).
Reporting income from property.
You should report income from property transferred to your spouse
or former spouse as shown on Table 4.
For information on the treatment of interest on U.S. savings bonds,
see chapter 1 of Publication 550,
Investment Income and
Expenses.
Table 4. Property transferred Pursuant to Divorce
When you transfer property to your spouse (or former spouse, if
incident to your divorce), you must give your spouse sufficient
records to determine the adjusted basis and holding period of the
property on the date of the transfer. If you transfer investment
credit property with recapture potential, you also must provide
sufficient records to determine the amount and period of the
recapture.
Tax treatment of property received.
Property you receive from your spouse (or former spouse, if the
transfer is incident to your divorce) is treated as acquired by gift
for income tax purposes. Its value is not taxable to you.
Basis of property received.
Your basis in property received from your spouse (or former spouse,
if incident to your divorce) is the same as your spouse's adjusted
basis. This applies for determining either gain or loss when you later
dispose of the property. It applies whether the property's adjusted
basis is less than, equal to, or greater than either its value at the
time of the transfer or any consideration you paid. It also applies
even if the property's liabilities are more than its adjusted basis.
This rule generally applies to all property received after July 18,
1984, under a divorce or separation instrument in effect after that
date. It also applies to all other property received after 1983 for
which you and your spouse (or former spouse) made a section 1041
election to apply this rule.
For information about that
election, see section 1.1041-1T(g) of the regulations.
Example.
Karen and Don owned their home jointly. Karen transferred her
interest in the home to Don as part of their property settlement when
they divorced last year. Don's basis in the interest received from
Karen is her adjusted basis in the home. His total basis in the home
is their joint adjusted basis.
Property received before July 19, 1984.
Your basis in property received in settlement of marital support
rights before July 19, 1984, or under an instrument in effect before
that date (other than property for which you made a section 1041
election) is its fair market value when you received it.
Example.
Larry and Gina owned their home jointly before their divorce in
1978. That year, Gina received Larry's interest in the home in
settlement of her marital support rights. Gina's basis in the interest
received from Larry is the part of the home's fair market value
proportionate to that interest. Her total basis in the home is that
part of the fair market value plus her adjusted basis in her own
interest.
Property transferred in trust.
If the transferor recognizes gain on property transferred in trust,
as described earlier under Transfers in trust, the trust's
basis in the property is increased by the recognized gain.
Example.
Your spouse transfers property in trust, recognizing a $4,000 gain.
Your spouse's adjusted basis in the property was $1,000. The trust's
basis in the property is $5,000 ($1,000 + $4,000).
Gift Tax on Property Settlements
The federal gift tax does not apply to most transfers of property
between spouses, or between former spouses because of divorce. The
transfers usually qualify for one or more of the exceptions explained
in this discussion. However, if your transfer of property does not
qualify for an exception, or qualifies only in part, you must report
it on a gift tax return. See Gift Tax Return, later.
For more information about the federal gift tax, get Publication 950,
Introduction to Estate and Gift Taxes, and Form 709,
United States Gift (and Generation-Skipping Transfer) Tax
Return, and its instructions.
Exceptions
Your transfer of property to your spouse or former spouse is not
subject to gift tax if it meets any of the following exceptions.
- It is made in settlement of marital support rights.
- It qualifies for the marital deduction.
- It is made under a divorce decree.
- It is made under a written agreement, and you are divorced
within a specified period.
- It qualifies for the annual exclusion.
Settlement of marital support rights.
A transfer in settlement of marital support rights is not subject
to gift tax to the extent the value of the property transferred is not
more than the value of those rights. This exception does not apply to
a transfer in settlement of dower, curtesy, or other marital property
rights.
Marital deduction.
A transfer of property to your spouse before receiving a final
decree of divorce or separate maintenance is not subject to gift tax.
However, this exception does not apply to:
- Transfers of certain terminable interests, or
- Transfers to your spouse if your spouse is not a U.S.
citizen.
Transfer under divorce decree.
A transfer of property under the decree of a divorce court having
the power to prescribe a property settlement is not subject to gift
tax. This exception also applies to a property settlement agreed on
before the divorce if it was made part of or approved by the decree.
Transfer under written agreement.
A transfer of property under a written agreement in settlement of
marital rights or to provide a reasonable child support allowance is
not subject to gift tax if you are divorced within the 3-year period
beginning 1 year before and ending 2 years after the date of the
agreement. This exception applies whether or not the agreement is part
of or approved by the divorce decree.
Annual exclusion.
The first $10,000 of gifts of present interests to any person
during 2001 is not subject to gift tax. The annual exclusion is
$106,000 for transfers to a spouse who is not a U.S. citizen provided
the gift would otherwise qualify for the gift tax marital deduction if
the donee were a U.S. citizen.
Present interest.
A gift is considered a present interest if the donee has
unrestricted rights to the immediate use, possession, and enjoyment of
the property and income from the property.
Gift Tax Return
Report a transfer of property subject to gift tax on Form 709.
Generally, Form 709 is due April 15 following the year of the
transfer.
Transfer under written agreement.
If a property transfer would be subject to gift tax except that it
is made under a written agreement, and you do not receive a final
decree of divorce by the due date for filing the gift tax return, you
must report the transfer on Form 709 and attach a copy of your written
agreement. The transfer will be treated as not subject to the gift tax
until the final decree of divorce is granted, but no longer than 2
years after the effective date of the written agreement.
Within 60 days after you receive a final decree of divorce, send a
certified copy of the decree to the IRS office where you filed Form
709.
Sale of Jointly-Owned Property
If you sell property that you and your spouse own jointly, you must
report your share of the recognized gain or loss on your income tax
return for the year of the sale. Your share of the gain or loss is
determined by your state law governing ownership of property. For
information on reporting gain or loss, get Publication 544.
Sale of home.
If you sold your main home, you may be able to exclude up to
$250,000 (up to $500,000 if you and your spouse file a joint return)
of gain on the sale. For more information, see Publication 523,
Selling Your Home.
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