Tax Implications of Divorce Flashcards

When one spouse transfers appreciated property to the other as part of a divorce settlement, what are the immediate tax consequences?

Answer: No gain or loss is recognized by either spouse at the time of transfer

Under IRC Section 1041, transfers between spouses incident to divorce are tax-free; no gain or loss is recognized at the time of transfer.

What carryover basis rule applies when property is received from a spouse as part of a divorce settlement?

Answer: The receiving spouse takes the transferring spouse's original adjusted basis

The recipient spouse takes over the transferring spouse's adjusted basis (carryover basis), meaning future gains include all prior appreciation.

A couple sells their jointly-owned primary residence as part of their divorce. They lived there as their primary home for 3 of the last 5 years. How much capital gain can they jointly exclude?

Answer: $500,000 total (up to $250,000 each)

Married couples filing jointly can exclude up to $500,000 of gain on a primary residence sale, provided both meet the use and ownership tests.

After divorce, one spouse retains the marital home and sells it two years later. They lived there as their primary residence for 4 of the last 5 years. What is their maximum capital gain exclusion?

Answer: $250,000

A single taxpayer who meets the 2-of-5-year ownership and use tests can exclude up to $250,000 of gain from the sale of their primary residence.

One divorced spouse receives the family home but cannot sell it for several years. In the meantime, the home depreciates in value. What tax planning concern should the CDA highlight?

Answer: Capital losses on the sale of a personal residence are not deductible, so any decrease in value below the carryover basis is a permanent loss

Losses on the sale of personal-use property (like a primary residence) are not deductible, so if the home is sold below carryover basis, the loss cannot be used to offset taxes.

Which IRS provision governs the tax-free transfer of property between spouses or former spouses incident to divorce?

Answer: IRC Section 1041

IRC Section 1041 specifically governs property transfers between spouses or former spouses incident to divorce, making such transfers non-taxable events.

A divorcing spouse transfers stock with a basis of $20,000 and a fair market value of $80,000 to the other spouse. What tax consequence occurs for the receiving spouse when the stock is later sold for $90,000?

Answer: Capital gain of $70,000 (sale price minus carryover basis of $20,000)

The receiving spouse takes the $20,000 carryover basis, so selling at $90,000 triggers a $70,000 capital gain — including all appreciation that occurred before the transfer.