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Federal Income Tax Effects of Property Transfers to a Spouse 
 
by kmhagen September 09, 2005

Generally, transfers of property to a spouse, or former spouse in a divorce settlement, do not result in gains or losses for income tax purposes. The basis of property to the receiving spouse is generally the same as the adjusted basis for the spouse transferring the property.

Normally when property is transferred to a spouse, or to a trust in benefit of a spouse, no gain or loss is recognized for U.S. federal income tax purposes.  This is true even if the transfer is made in exchange for cash or for other consideration.  This tax treatment applies to transfers of real and personal property, tangible and intangible property, and separate or community property.

But there are certain cases when property transfers between spouses may not qualify for the  non-recognition of gain or loss for tax purposes.  One of these cases is when your spouse or former spouse is a non-resident alien.

Property Transfers Incident to a Divorce

The non-recognition of gains and losses also applies to property transfers that are incident to a divorce.  A property transfer is considered incident to a divorce if it is made within one year after the marriage ends, or is related to the ending of marriage.  In order to be considered as related to the ending of a marriage, the property transfer must be made under the original or modified divorce or separation instrument, and the transfer must occur within 6 years after the date the marriage ends.

Transfers in Trust

Generally, gain or loss is not recognized on transfers of property you make in trust for the benefit of your spouse or former spouse.  But if you transfer property subject to a liability, and the trust assumes the liability, you have to recognize a gain for  the amount by which the liabilities assumed by the trust exceed your adjusted basis in the property.

For example, if you transfer property to a trust in benefit of your former spouse, that has an adjusted basis of $22,000 to you and has an outstanding mortgage balance of $25,000, you have to recognize a gain of $3,000.

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