Legal Analysts
In contrast to the rule on transfer tax, just discussed, Federal Law provides that such a transfer of property incident to divorce does not work a gain or loss concerning capital gains tax; hence no stepped-up in basis results.
§ 1041. Transfers of property between spouses or incident to divorce
No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)—
(2) a former spouse, but only if the transfer is incident to the divorce.
Recently, I attended a meeting of divorce attorneys in a group called the Collaborative Lawyers Association of New York (alternative dispute resolution for divorce). At the meeting, our group had mixed feelings if a transfer of real property between spouses at divorce was for no consideration (no tax) or for fair market value (tax). Ethically, the attorneys agreed that this matter required further research.
As it turns out there is a taxable event according to the New York Code of Rules and Regulations.
20 NYCRR 575.11(a)(10): A conveyance from one spouse to the other pursuant to the terms fo a divorce or separation agreement is subject to tax. (There is a rebuttable presumption in such case, that the consideration for the conveyance, which includes the relinquishment of marital rights, is equal to the fair market value of the interest in the real property conveyed.).
The takeaway is that even though you and your spouse own a piece of property already, when you transfer it to each other as part of a divorce settlement, you will be taxed or you are committing tax fraud.
BE WARNED.
