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Tax Preparation online help - Divorce and Separation transfer of property

This section of Tax Preparation online help covers the transfer of property due to a divorce or separation. The tax implications on the sale or transfer of one's residence because of a divorce can vary substantially depending on whether the couple retains ownership, sells, or transfers the property.

If the title of the property is given to your spouse or former spouse

If title is given to your spouse or former spouse, incident to divorce, no gain or loss is recognized on the transfer. A transfer of property is incident to divorce if:

  • the transfer occurs within one year after the date on which the marriage ends, or

  • if the transfer is related to the ending of the marriage.

The spouse receiving the property takes the basis of the transferring spouse. This result occurs even if the spouse who retains the residence pays cash and the transaction is made in the form of a sale.

If you retain the title of the property

Alternatively,  you can retain your interest in the residence even though you no longer live there. This option may be attractive if there are not enough assets to compensate you for your interest in the residence. You and your spouse could agree, pursuant to the settlement, that the residence subsequently will be sold (for example, when the children no longer live there) and the proceeds from the sale divided between the two of you. Your spouse could then use the tax exclusion. Or, alternatively, couples may decide to sell the house to a third party and split the proceeds.

If you decide to retain your interest in the residence, you should consider transferring it to your spouse and as part of the divorce settlement require him or her to divide the proceeds upon sale. Consequently, any applicable exclusions may be used toward the entire proceeds.