As you and your spouse are dividing up property in your divorce, you may be transferring assets that are in one of your names to the other person. Maybe, for example, you’re transferring some investments in your name to your spouse.
Whether it’s a home, a vehicle or stocks, there’s a lot of transferring of assets in a divorce. Do you need to worry about paying taxes on capital gains? Generally, you don’t. The Internal Revenue Service (IRS) doesn’t worry about capital gains or losses on transfers considered “incident to the divorce.” You own the asset at whatever the current value is and don’t have to worry if it has increased considerably in value since the time it was purchased.
Section 1041 transfers
Specifically, transfers that occur between former spouses within one year of the date the final divorce decree is signed are presumed to be what are known as Section 1041 transfers. You don’t even need to provide documentary proof that the transfers were part of your divorce settlement. Say your ex decides to give you some additional stock months after the divorce is final. It’s presumed to be part of the divorce, whether it is or not.
Some transfers – for example, of real estate – may take some time to complete. Therefore, after a year (and up until six years after the divorce) a property transfer between ex-spouses will be considered tax-free under Section 1041. However, it must be either part of the negotiated divorce settlement, any modifications to that settlement or a court order that was part of the divorce.
This freedom from capital gains taxes can be a big factor in determining what assets you want to seek or are willing to part with in your divorce. With experienced legal, financial and tax guidance, you can make the decisions that are best for your financial well-being.