Publication 504 - Divorced or Separated Individuals

Publication 504

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Generally, 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.

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Transfer Between Spouses

Generally, 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 consideration.

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This rule does not apply in the following situations.

Your spouse or former spouse is a nonresident alien.
Certain transfers in trust, discussed later.
Certain stock redemptions under a divorce or separation instrument or a valid written agreement that are taxable under applicable tax law, as discussed in Regulations section 1.1041-2.

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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.

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If you transfer your interest in an HSA 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 HSA.

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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.

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The treatment of the transfer of an interest in an IRA as a result of divorce is similar to that just described for the transfer of an interest in an HSA and an Archer MSA. See IRA transferred as a result of divorce, earlier, under Individual Retirement Arrangements.

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A property transfer is incident to your divorce if the transfer:

Occurs within 1 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.

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A property transfer is related to the ending of your marriage if both of 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.

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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 Internal Revenue Code section 1041. You must receive the consent before filing your tax return for the year you transfer the property.

This treatment does not apply to transfers to which Regulations section 1.1041-2 (certain stock redemptions) applies.

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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 as gain on the transfer of property in trust 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.

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Example.(p20)

You own property with a fair market value of $12,000 and an adjusted basis of $1,000. You transfer the property in trust for the benefit of your spouse. The trust did not assume any liabilities. The property is subject to a $5,000 liability. Your recognized gain is $4,000 ($5,000 − $1,000).

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You should report income from property transferred to your spouse or former spouse as shown in Table 5.

For information on the treatment of interest on transferred U.S. savings bonds, see chapter 1 of Publication 550, Investment Income and Expenses.

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.

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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.

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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 how to make that election, see Temporary Regulations section 1.1041-1T(g).

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Example.(p20)

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.

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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 and your spouse (or former spouse) made a "section 1041 election") is its fair market value when you received it.

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Table 5. Property Transferred Pursuant to Divorce

The tax treatment of items of property transferred from you to your spouse or former spouse pursuant to your divorce is shown below.

IF you transfer ...		THEN you ...	AND your spouse or former spouse ...	FOR more information, see ...
	income-producing property (such as an interest in a business, rental property, stocks, or bonds)	include on your tax return any profit or loss, rental income or loss, dividends, or interest generated or derived from the property during the year until the property is transferred	reports any income or loss generated or derived after the property is transferred.	Publication 550, Investment Income and Expenses. (See Ownership transferred under U. S. Savings Bonds in chapter 1.)
	interest in a passive activity with unused passive activity losses	cannot deduct your accumulated unused passive activity losses allocable to the interest	increases the adjusted basis of the transferred interest by the amount of the unused losses.	Publication 925, Passive Activity and At-Risk Rules.
	investment credit property with recapture potential	do not have to recapture any part of the credit	may have to recapture part of the credit if he or she disposes of the property or changes its use before the end of the recapture period.	Form 4255, Recapture of Investment Credit.
	interests in nonstatutory stock options and nonqualified deferred compensation	do not include any amount in gross income upon the transfer	includes an amount in gross income when he or she exercises the stock options or when the deferred compensation is paid or made available to him or her.

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Example.(p20)

Larry and Gina owned their home jointly before their divorce in 1983. 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.

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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.

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Example.(p20)

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).

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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, see Publication 950, Introduction to Estate and Gift Taxes, and Form 709 and its instructions.

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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.

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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 material property rights.

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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.

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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.

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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.

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The first $13,000 of gifts of present interests to each person during 2012 is not subject to gift tax. The annual exclusion is $139,000 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.

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A gift is considered a present interest if the donee has unrestricted rights to the immediate use, possession, and enjoyment of the property or income from the property.

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Income Tax on an Estate

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.

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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.

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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, see Publication 544.

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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, including special rules that apply to separated and divorced individuals selling a main home, see Publication 523, Selling Your Home.

Previous Page | Table of Contents | Top of Page | Index | Next Page Right Arrow

Property Settlements(p18)

Transfer Between Spouses(p19)

Exceptions to nonrecognition rule.(p19)

Property subject to nonrecognition rule.(p19)

Health savings account (HSA).(p19)

Archer medical savings account (MSA).(p19)

Individual retirement arrangement (IRA).(p19)

Incident to divorce.(p19)

Transfers to third parties.(p19)

Transfers in trust.(p19)

Example.(p20)

Reporting income from property.(p20)

Tax treatment of property received.(p20)

Basis of property received.(p20)

Example.(p20)

Example.(p20)

Example.(p20)

Gift Tax on Property Settlements(p20)

Exceptions(p20)

Settlement of marital support rights.(p20)

Marital deduction.(p20)

Transfer under divorce decree.(p21)

Transfer under written agreement.(p21)

Annual exclusion.(p21)

Gift Tax Return(p21)

Transfer under written agreement.(p21)

Sale of Jointly-Owned Property(p22)

Sale of home.(p22)