Property Transfers and their tax consequences: NY Divorce Laws

ARTICLE TITLE: Property Transfers and their tax consequences
The general rule is that when property is transferred from one spouse to another, and the transfer is “incident to the divorce” no taxable event has occurred.
Taxes generally
As a general rule, the Courts in New York will consider the tax consequences of a property settlement/distribution. But it is the parties’ responsibility to bring this concern to the court. Otherwise the court can issue a distributive scheme that does not take the adverse tax consequences into consideration and either spouse could have serious tax liabilities are a result, depending on the transaction.
In the case of transfering stocks: no gain or loss is recognized by the spouse who transferred the property to the other spouse; the spouse who receives the stock gets a “carryover basis” in the property, and the holding period “tacks.” This is important because it means the spouse who gives the stock does not pay taxes on the gain and the spouse who receives COULD pay taxes on the receipt of this gain.
Life Insurance Policies
Life insurance proceeds are not taxable to the spouse who is giving the benefit to the other. Nor is it considered part of the gross income of the receiving spouse.
Qualified Retirement Plans
Generally, when transferring the benefits of a retirement plan (through a Qualified Domestic Relations Order) no taxable event will occur, even if there is a premature distribution.
Marital Residence
A taxpayer can generally exclude up to $125,000 $250,000 (oops!) from gross income from the sale of their home if they are over 55 and they lived in the house more than three years before the sale. Called the 1034 gain, this exclusion is a one-time exclusion. That means if you take it one time, you can’t take it ever again for the same property. If the parties are married, both spouses must join in the election.
Alimony is taxable. How do you know if you are receiving alimony as opposed to a property transfer? Sometimes it is not easy to distinguish the two. But generally speaking in order for a transfer to be considered alimony it must:
1. be in cash
2. be received by a spouse under a divorce or separation scheme
3. be expressly described as alimony or, not described as “not alimony.”
4. spouses must not be living in the same house at the time the payment is made.
5. no payments need be made after the death of the spouse who is receiving the payments.
6. alimony does not have to be paid directly to the spouse. It could take the form of rent, mortgage, tuition and tax payments to a third party.