Are Interspousal Transfers Of Gifts and Property Taxable?

Interspousal transfers of cash and separate property are usually not taxable. 26 U.S. Code §1041 provides that a transfer between spouses, or former spouses when “incident to divorce”, is not taxable in most circumstances. The transfer is treated as a gift.

26 USC §1041:

(a) General Rule – No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of) –

(1) a spouse, or

(2) a former spouse, but only if the transfer is incident to the divorce.

(b) Transfer treated as gift; transferee has transferor’s basis.

In the case of any transfer of property described in subsection (a) –

(1) for purposes of this subtitle, the property shall be treated as acquired by the transferee by gift, and

(2) the basis of the transferee in the property shall be the adjusted basis of the transferor.

(c) Incident to divorce

For purposes of subsection (a)(2), a transfer of property is incident to the divorce if such transfer –

(1) occurs within 1 year after the date on which the marriage ceases, or

(2) is related to the cessation of the marriage.

(d) Special rule where spouse is a nonresident alien

Subsection (a) shall not apply if the spouse (or former spouse) of the individual making the transfer is a nonresident alien.

(e) Transfers in trust where liability exceeds basis

Subsection (a) shall not apply to the transfer of property in trust to the extent that –

(1) the sum of the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceeds

(2) the total of the adjusted basis of the property transferred.

Are Required Payments In A Prenup Or Postnup Taxable?

It is common for a prenuptial or postnuptial agreement to require payments between spouses. Those are usually not taxable.

Is Alimony Taxable?

Alimony is taxable to the ex-spouse receiving the money. The ex-spouse who pays alimony deducts it from adjusted gross income. If a divorce decree states that post-divorce payments are not alimony, but necessary to a just and right division of the community estate, check with a tax advisor about reporting those payments to the I.R.S. Property division is not taxable. The I.R.S. has rules to prevent disguising alimony as property division, and vice versa.

Qualified Domestic Relations Order

Some tax-deferred accounts can be transferred between spouses without triggering withdrawal penalties or taxes, but the tax must still be paid when the spouse to whom they were transferred withdraws the funds.

The same rules apply in divorce. Tax-deferred funds or accounts may be transferred in whole or part to a spouse without incurring penalties or taxes. In divorce, benefits in a pension or 401(k) are transferred via a qualified domestic relations order (“QDRO”). The entire amount awarded is transferred and taxes are paid when the recipient spouse (“alternate payee”) withdraws the money. I.R.A. funds are transferred without a QDRO but treated the same for taxes. No penalty or tax is due because of the transfer.

A QDRO can only be part of divorce. I.R.A. funds can be transferred any time.

Interspousal Transfers To A Non-Resident Alien Spouse

The amount you can transfer tax-free to a non-resident alien spouse is limited so check with a tax advisor if your spouse is an alien who does not reside in the United States.

Most Transfers Between Spouses & Former Spouses Are Not Taxable

The general rule is that property and funds transfers between spouses during marriage and in divorce are not taxable, except for post-divorce alimony. Gifts between spouses during marriage are usually not taxable, regardless of the amount.

Brian McNamara is a family law attorney, not a tax lawyer. This is general information. See a tax advisor about your personal situation.

DISCLAIMER: This site and any information contained herein in intended for informational purposes only and should not be as legal advice. Seek competent legal counsel for advice on any legal matter.

© Copyright Brian McNamara, 2016,may be reproduced with credit to the author.