Income may have to be reported on certain property transfers to a spouse or former spouse:
When income-producing property is transferred, the spouse who transfers the property must report the income up until the date of transfer, and the spouse who receives the property must report income after the transfer. This property includes an interest in a business, rental property, stocks and bonds.
When an interest in a passive activity is transferred, there may be unused passive activity losses that have not been deducted for income tax purposes due to the limitation on passive activity losses. A passive activity for tax purposes is a trade or business in which you do not materially participate, or a rental activity, even if you do materially participate, unless you are a real estate professional. In this case, the spouse who transfers the interest cannot claim the unused passive activity losses, and these unused losses are added to the adjusted basis of the property for the receiving spouse.
If property on which an investment credit has been taken is transferred, and there is a possibility that part of the investment tax credit may have to be recaptured if the property is sold or disposed of, the spouse who transfers the property does not have to recapture any part of the credit, and the receiving spouse may have to recapture part of the credit if he or she sells or disposes of the property or changes its use during the recapture period.
If non-statutory stock options (options not qualified for special tax treatment) are transferred, the spouse who transfers them does not have to report any income, and the receiving spouse has to report income when he or she exercises the option.
If non-qualified deferred compensation is transferred, the spouse who transfers it does not have to include it in income, and the receiving spouse must include it in income when it is paid or made available to him or her.