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Divorce Property Settlement Laws

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Divorce Property Settlement Laws

When a taxpayer pays alimony to his/her former spouse, it is a deduction for the paying party and income for the receiving party. However, payments for the former spouse's interest in property are treated differently than alimony. 

What Are The Tax Consequences Of Property Settlements?

Generally, when a taxpayer transfers property with or without consideration (i.e. money) to his/her spouse or former spouse incident to a divorce, no gain or loss is recognized from the transfer.

What Is Incident To A Divorce?

According to the tax law, a transfer is incident to a divorce if:

  • It occurs within a year after the termination of the marriage; or
  • It is related to the cessation of the marriage (can take place beyond a year).

When Is a Transfer Related to the Cessation of the Marriage?

A transfer is treated as related to the cessation of the marriage if it is:

  • Pursuant to a divorce or separation decree; and 
  • Made within 6 years after the termination if the marriage.

A transfer that does not meet these two criteria is presumed to be not related to the cessation of the marriage. However, this presumption may be rebutted with evidence that shows otherwise.

For example: B and C is getting a divorce. B sells his house he bought for $50,000 to C for $30,000 2 months after the divorce. B does not recognize any loss from the sale.

What Is the Basis of the Property for the Receiving Party?

The receiving party will have a basis in the property that is the same as the giving party.

Does This Rule Apply If My Spouse or Former Spouse Is a Nonresident Alien?

No. Transfers to a nonresident alien spouse or former spouse are taxable.

Do I Need a Tax Attorney?

By working with your ex-spouse, there are a number of ways in which you can structure the spousal support order to achieve a maximum tax benefit. However, it is very important that you work with an attorney experienced in tax matters when doing this to ensure that you do not violate any IRS regulations.

Photo of page author Ken LaMance

, LegalMatch Law Library Managing Editor and Attorney at Law

Last Modified: 06-05-2014 12:33 PM PDT

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