When a transfer is made to a third party on behalf of your spouse or former spouse it is treated as two separate transfers. The first is considered to be a transfer from you to your spouse or former spouse, and the second is a transfer from your spouse or former spouse to the third party. You do not recognize any gain or loss on the first deemed transfer, but your spouse or former spouse may have to recognize gain or loss on the second deemed transfer.
This treatment applies when:
The transfer of property to a third party is required by your divorce or separation instrument.
Your spouse or former spouse gives you a written request to transfer the property to a third party.
Your spouse or former spouse consents to the transfer in writing. This written consent must indicate the intention of both of you to treat the transfer as being subject to section 1041 of the Internal Revenue Code.
Basis of Property Received by a Spouse
For property you received from your spouse after July 18, 1984, under a divorce or separation instrument in effect on that date, and for property transferred after 1983, under which you and your spouse elected to treat the transfer under section 1041 of the Internal Revenue Code, the adjusted basis to the spouse who receives the property is the same as the adjusted basis of the spouse giving up the property. This is the case regardless of the property’s fair market value at the transfer date and regardless of any consideration you paid for the property. This is the basis that is used to determine whether you have a gain or loss if you subsequently sell or dispose of the property.
For property you received on or before July 18, 1984 in settlement of marital support rights, your adjusted basis is the property’s fair market value on the date you received it, unless you made the section 1041 election.
For example:
If a house was jointly owned and under a divorce instrument in effect after July 18, 1984, one spouse’s interest in the house was transferred to the other spouse, the adjusted basis in the house for the receiving spouse will be the combined adjusted basis before the divorce.
If the house was jointly owned and half the interest in the house was transferred under a divorce settlement on or before July 18, 1984, the adjusted basis for the receiving spouse will be his or her adjusted basis in one half of the house plus one half the fair market value of the house on the date of the transfer.