GETTING DIVORCED DURING THE TAX SEASON? CHECK OUT 26 U.S. Code § 1041 – Transfers of property between spouses or incident to divorce.
So, it’s tax season and there is no more complicated time to divorce than at this time. Getting divorced during tax season has got to be the worse timing possible as a matter of fact. Although, no matter when you do decide to divorce, the tax laws will equally apply.
With that all being said, in this post I discussed property division and specifically the criteria judges used to determine what divorcing parties would get in their property settlement. I briefly touched on the issue of alimony vs property settlement and the taxable consequences. Generally speaking, alimony is taxable and property settlement is not. But I also pointed out that it is not always easy to determine if a transfer is incident to alimony or property settlement. Just because it is in “cash” for example does not necessarily mean it is “alimony.”
A property settlement can be in cash and therefore would not be taxable.
But I what I neglected to mention is 26 US Code Section 1041 which deals with property transfers between spouses incident to a divorce. And this regulation explains that so long as property is transferred “incident to a divorce” meaning it occurs within a year after a divorce and/or is related to the cessation of the marriage, that no gain or loss would be recognized to either party in the transaction.
The general rule for section 1041 is as follows:
The general rule in § 1041(a) is that no gain or loss shall be recognized on a transfer of property from an individual to a spouse; OR a transfer of property to a former spouse if the transfer is incident to the divorce. This rule also applies on a transfer of property from a trust for the benefit of a spouse or former spouse if the transfer is incident to the divorce. For the purposes of this subsection, § 1041(c) states a transfer of property is incident to divorce if such a transfer either occurs within 1 year after the date on which the marriage ends, or is related to the end of the marriage.
There are exceptions and exclusions to the general rule because if the spouse doing the transfer of property is a “non-resident alien” the law would recognize gains and losses incident to the transfer of property.
Ultimately, if you are getting divorced during the tax season (or not) and there is a transfer of property involved, you absolutely need to get advice from your accountant and financial specialists and tax advisers as this stuff can be quite complicated. Obviously, this post is simply informational and not meant to serve as legal advice.
Of course, as of 2019 getting divorced during tax season should be even more stressful. There will be changes to the tax code and you should definitely find out from your financial advisers who these changes will affect not just property transfers but also alimony payments as well.