The Tax Consequences of a Divorce: Property Transfers

A divorce usually involves some transfer of property, whether it be an interest in a house or other real property, a business interest, or even an investment. Contrary to the stereotype of the IRS, most of these transfers do not incur any tax liability.

As long as the property transfer is “incident to divorce,” there is no gain or loss associated with the transfer. A transfer is “incident to divorce” if it occurs within one year of the date of the divorce or is “related to the cessation of the marriage.” If the transfer occurs within six years of the date of divorce and is made pursuant to a divorce decree or separation agreement, then the IRS considers the transfer to be related to the cessation of the marriage.

When dividing property between spouses, attorneys and courts should consider the basis of the property. “Basis,” in a nutshell, is what the property originally cost. Property transfers incident to divorce have a carryover basis. That is, the basis is carried over from the original purchaser to the person who receives the property in the transfer.

There may be capital gains, which may be taxed, upon the later sale of the property. Thus, it is possible for both a husband and wife to receive property worth $100,000 in the divorce. If the wife’s property has a basis of $70,000 and the husband’s has a basis of $10,000, then it can be seen that the husband’s property may be considered more valuable even though both pieces of property have an equal fair market value.