What are the tax effects on splitting up the marital assets or
selling the house?
Tax regulations are highly complicated and
complex (hence the tax accounting industry), so what is presented here is a
generalized summary for more common situations. It may not
apply to you if your situation is more complex than average.
Property Transfers
Generally speaking, when the marital
assets are divided up between the spouses, there is no recognized tax gain
or loss (however, you may have to report the transaction on a gift tax
return). Any transfer of property to a spouse or former spouse on
which gain or loss is not recognized is treated by the recipient as a gift
and is not considered a sale or exchange. The transfer of assets has to be incident to the divorce,
occurring within one year after the date your marriage ends or is related to the ending of your marriage.
A property transfer is related to the ending of your marriage if the
transfer is made under your original or modified divorce or separation
instrument AND the transfer occurs within 6 years after the date your
marriage ends.
The recipient's basis in the property will be the same as the
adjusted basis of the property to the giver immediately before the transfer.
This carryover basis rule applies whether the adjusted basis of the
transferred property is less than, equal to, or greater than either its fair
market value at the time of transfer or any consideration paid by the
recipient. This rule applies for determining loss as well as gain. Any gain
recognized on a transfer in trust increases the basis.
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 and an immediate transfer onto the third party. A gain or loss
is not recognized 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: (1) required by your divorce or separation instrument;
(2) requested in writing by your spouse or former spouse; (3) 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
section 1041 of the Internal Revenue Code. You must receive the consent
before filing your tax return for the year you transfer the property.
Sale of Property or Home
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. 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. The exclusion applies as follows:
- You must have lived in the principle residence for 2 of the last 5
years
- Each spouse is eligible for the $250,000 exclusion
- The $250,000 exclusion can be applied on the sale of another home
every 2 years
- If it is done sooner than 2 years, it is prorated
- If the couple jointly own the house after the divorce, and if one of
them qualifies for the $250,000 exclusion because they occupied the house
2 out of 5 years, then the other spouse also qualifies for the $250,000
exclusion
- If one spouse buys half the house from the other during the first year
after the divorce, the basis on the original half is the original basis of
that half; the basis of the 2nd half is the selling price
- In this case, the seller (or owner of the first half) pays no tax
If you transfer your home to your spouse, or to your former spouse
incident to your divorce, you generally have no gain or loss (unless the
Exception, discussed next, applies). This is true even if you receive cash
or other consideration for the home.
If you owned your home jointly with your spouse and transfer your interest
in the home to your spouse, or to your former spouse incident to your
divorce, the same rule applies. You have no gain or loss. Exception:
these transfer rules do not apply if your spouse or former spouse is a
nonresident alien. In that case, you generally will have a gain or
loss.
If your home was transferred to you by your spouse (or former spouse if
the transfer was incident to divorce), you are considered to have owned it
during any period of time when your spouse owned it.
Use of home after divorce: you are considered to have used property as
your main home during any period when: you owned it, AND your spouse or
former spouse is allowed to live in it under a divorce or separation
instrument and uses it as his or her main home.
You can get more information at the
IRS website for:
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