Property Settlements There is no recognized gain or loss on the transfer of propertybetween spouses, or former spouses, if the transfer is because of adivorce. You may, however, have to report the transaction on a gifttax return. See Gift Tax on Property Settlements, later.If you sell property that you own jointly to split the proceeds aspart of your property settlement, you each must report your share ofthe gain or loss on the sale. See Sale of Jointly-Owned Property,later. Transfer Between Spouses No gain or loss is recognized on a transfer of property from you to(or in trust for the benefit of): Your spouse, or Séville hôtelsYour former spouse, but only if the transfer is incident toyour divorce. This rule applies even if the transfer was in exchange forcash, the release of marital rights, the assumption of liabilities, orother considerations. However, this rule does not apply if your spouse or former spouseis a nonresident alien. Nor does it apply to certain transfers coveredunder Transfers in trust, later. The term "property" includes all property whether real orpersonal, tangible or intangible, or separate or community. Itincludes property acquired after the end of your marriage andtransferred to your former spouse. It does not include services. Medical savings accounts.If you transfer your interest in a medical savings account to yourspouse or former spouse under a divorce or separation instrument, itis not considered a taxable transfer. After the transfer, the interestis treated as your spouse's medical savings account. Incident to divorce.ERROR MSGA property transfer is incident to your divorce if the transfer: Occurs within one 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 yourmarriage by annulment or due to violations of state laws. Related to the ending of marriage.A property transfer is related to the ending of your marriage ifboth the following conditions apply. The transfer is made under your original or modified divorceor separation instrument. The transfer occurs within 6 years after the date yourmarriage ends. Unless these conditions are met, the transfer is presumed not to berelated to the ending of your marriage. However, this presumption willnot apply if you can show that the transfer was made to carry out thedivision of property owned by you and your spouse at the time yourmarriage ended. For example, the presumption will not apply if you canshow that the transfer was made more than 6 years after the end ofyour marriage because of business or legal factors which preventedearlier transfer of the property and the transfer was made promptlyafter those factors were taken care of. Transfers to third parties.If you transfer property to a third party on behalf of your spouse(or former spouse, if incident to your divorce), the transfer istreated as two transfers: A transfer of the property from you to your spouse or formerspouse, and An immediate transfer of the property from your spouse orformer 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 orloss on the second transfer. For this treatment to apply, the transfer from you to the thirdparty must be one of the following: Required by your divorce or separation instrument, Requested in writing by your spouse or former spouse,or Consented to in writing by your spouse or former spouse. Theconsent must state that both you and your spouse or former spouseintend the transfer to be treated as a transfer from you to yourspouse or former spouse subject to the rules of section 1041 of theInternal Revenue Code. You must receive the consent before filing yourtax return for the year you transfer the property. Transfers in trust.If you make a transfer of property in trust for the benefit of yourspouse (or former spouse, if incident to your divorce), you generallydo not recognize any gain or loss. Torquay hotel roomsHowever, you must recognize gain or loss if, incident to yourdivorce, you transfer an installment obligation in trust for thebenefit of your former spouse. For information on the disposition ofan installment obligation, see Publication 537, InstallmentSales. You also must recognize gain on the transfer of property in trustin the amount by which the liabilities assumed by the trust, plus theliabilities to which the property is subject, exceeds the total ofyour adjusted basis in the transferred property. Example.You own property with a fair market value of $10,000 and anadjusted basis of $1,000. The trust did not assume any liabilities.The property is subject to a $5,000 liability. Your recognized gain onthe transfer of the property in trust for the benefit of your spouseis $4,000 ($5,000 - $1,000). Reporting income from property.You should report income from property transferred to your spouseor former spouse as shown on Table 4. For information on the treatment of interest on U.S. savings bonds,see chapter 1 of Publication 550, Investment Income andExpenses. Table 4. Property transferred Pursuant to Divorce Files: When you transfer property to your spouse (or former spouse, ifincident to divorce), you must give your spouse sufficient records todetermine the adjusted basis and holding period of the property on thedate of the transfer. If you transfer investment credit property withrecapture potential, you also must provide sufficient records todetermine the amount and period of the recapture. Tax treatment of property received.Property you receive from your spouse (or former spouse, if thetransfer is incident to divorce) is treated as acquired by gift forincome tax purposes. Its value is not taxable to you. Basis of property received.Your basis in property received from your spouse (or former spouse,if incident to divorce) is the same as your spouse's adjusted basis.This applies for determining either gain or loss when you laterdispose of the property. It applies whether the property's adjustedbasis is less than, equal to, or greater than either its value at thetime of the transfer or any consideration you paid. It also applieseven if the property's liabilities are more than its adjusted basis. Hotelgeschafte IkskileThis rule generally applies to all property received after July 18,1984, under a divorce or separation instrument in effect after thatdate. It also applies to all other property received after 1983 forwhich you and your spouse (or former spouse) made a section 1041election to apply this rule.For information aboutthat election, see Regulation section 1.1041-1T(g). Example.Karen and Don owned their home jointly. Karen transferred herinterest in the home to Don as part of their property settlement whenthey divorced last year. Don's basis in the interest received fromKaren is her adjusted basis in the home. His total basis in the homeis their joint adjusted basis. Property received before July 19, 1984.Your basis in property received in settlement of marital supportrights before July 19, 1984, or under an instrument in effect beforethat date (other than property for which you made a section 1041election) is its fair market value when you received it. Example.Larry and Gina owned their home jointly before their divorce in1978. That year, Gina received Larry's interest in the home insettlement of her marital support rights. Gina's basis in the interestreceived from Larry is the part of the home's fair market valueproportionate to that interest. Her total basis in the home is thatpart of the fair market value plus her adjusted basis in her owninterest. Property transferred in trust.If the transferor recognizes gain on property transferred in trust,as described earlier under Transfers in trust, the trust'sbasis in the property is increased by the recognized gain. Example.Your spouse transfers property in trust, recognizing a $4,000 gain.Your spouse's adjusted basis in the property was $1,000. The trust'sbasis in the property is $5,000 ($1,000 + $4,000). Gift Tax on Property Settlements The federal gift tax does not apply to most transfers of propertybetween spouses, or between former spouses because of divorce. Thetransfers usually qualify for one or more of the exceptions explainedin this discussion. However, if your transfer of property does notqualify for an exception, or qualifies only in part, you must reportit on a gift tax return. See Gift Tax Return, later. For more information about the federal gift tax, get Publication 950, Introduction to Estate and Gift Taxes. Exceptions Your transfer of property to your spouse or former spouse is notsubject 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 divorcedwithin a specified period. It qualifies for the annual exclusion. Settlement of marital support rights.A transfer in settlement of marital support rights is not subjectto gift tax to the extent the value of the property transferred is notmore than the value of those rights. This exception does not apply toa transfer in settlement of dower, curtesy, or other marital propertyrights. Marital deduction.A transfer of property to your spouse before receiving a finaldecree 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. Get the instructions for Form 709, United States Gift (andGeneration-Skipping Transfer) Tax Return, for more information. Transfer under divorce decree.A transfer of property under the decree of a divorce court havingthe power to prescribe a property settlement is not subject to gifttax. This exception also applies to a property settlement agreed onbefore the divorce if it was made part of or approved by the decree. Transfer under written agreement.A transfer of property under a written agreement in settlement ofmarital rights or to provide a reasonable child support allowance isnot subject to gift tax if you are divorced within the 3-year periodbeginning 1 year before and ending 2 years after the date of theagreement. This exception applies whether or not the agreement is partof or approved by the divorce decree. Annual exclusion.The first $10,000 of gifts of present interests to any personduring 1999 is not subject to gift tax. The annual exclusion is$101,000 for transfers to a spouse who is not a U.S. citizen providedthe gift would otherwise qualify for the gift tax marital deduction ifthe donee were a U.S. citizen. Present interest.A gift is considered a present interest if the donee has allimmediate rights to the use, possession, and enjoyment of the propertyand income from the property. Gift Tax Return Report a transfer of property subject to gift tax on Form 709.Generally, Form 709 is due April 15 following the year of thetransfer. Transfer under written agreement.If a property transfer would be subject to gift tax except that itis made under a written agreement, and you do not receive a finaldecree of divorce by the due date for filing the gift tax return, youmust report the transfer on Form 709 and attach a copy of your writtenagreement. The transfer will be treated as not subject to the gift taxuntil the final decree of divorce is granted, but no longer than 2years after the effective date of the written agreement. Within 60 days after you receive a final decree of divorce, send acertified copy of the decree to the IRS office where you filed Form709. Sale of Jointly-Owned Property If you sell property that you and your spouse own jointly, you mustreport your share of the gain or loss on your income tax return forthe year of the sale. Your share of the gain or loss is determined byyour state law governing ownership of property. For information onreporting gain or loss, get Publication 544. Sale of home before May 7, 1997.If you sold your main home before May 7, 1997, and you buy or builda new one in the time required, you may have been required to postponepaying the tax on some or all of any gain from the sale. If you andyour spouse had agreed to live apart and sold your jointly-owned home,the rules for postponing tax apply separately to the gain realized byeach of you. For information on these rules, and on the rules forexcluding gain if you were 55 or older when you sold your home, getPublication 523, Selling Your Home. If you are divorced after filing a joint return on which youpostponed tax on the gain on the sale of your home, but you do not buyor build a new home in the time required (and your former spousedoes), you must file an amended joint return to report the tax on yourshare of the gain. If your former spouse refuses to sign the amendedjoint return, attach a letter explaining why your former spouse'ssignature is missing. Sale of home after May 6, 1997.If you sold your main home after May 6, 1997, you may be able toexclude up to $250,000 (up to $500,000 if you and your spouse file ajoint return) of gain on the sale. For more information, seePublication 523.