Property division in divorce often involves transferring assets from one person to another to achieve a fair settlement. These can include homes, cars, stocks and more.
A common concern people often have is whether they’re responsible for capital gains taxes on a property transferred to them that has increased significantly in value. This most often applies to real estate and investments. If your spouse takes their name off an asset – for example, the title to a home – and puts your name on it, are you responsible for paying capital gains taxes on the amount it’s increased in value since it was purchased? Will your soon-to-be-ex have to pay capital gains taxes?
The good news is that generally you don’t have to worry about capital gains or losses on asset transfers that are “incident to the divorce.” If your spouse transfers an asset to you, you are considered to have received it at its current value. Therefore, it doesn’t matter what its value was when it was first purchased as far as the Internal Revenue Service (IRS) is concerned.
How long do you have to make Section 1041 transfers?
Under federal tax law, these transfers of property are called Section 1041 transfers after the Internal Revenue Code that addresses them. Because these transfers aren’t always completed by the time the divorce is final, the Internal Revenue Service (IRS) considers any property transfers between former spouses up to a year after the final divorce decree to be “incident to the divorce,” whether they are or not.
In divorces with complex assets involving a lot of property and land, transfers may take longer than a year to complete. Fortunately, those transfers can still qualify under Section 1041 as long as they were addressed in the divorce settlement or modification or in any court order that stemmed from the divorce.
Since taxes are (or should be) an important consideration when determining what assets you want to seek in your divorce, it’s important to understand Section 1041. If you and your spouse are dividing considerable and/or complex assets, it’s important to have your own tax and financial advisors in addition to sound legal guidance.
