April 11, 2011

Divorce Myths: Transferring Property On Divorce Will Create Income Tax Liability

In talking to Oregonians as part of my divorce law practice, I realized there is a lot of misinformation out there surrounding taxes and divorce. One “Divorce Myth” we come across is that there will be income tax consequences for transferring property from one spouse to the other at the time of divorce.

The transfer of property between spouses incident to divorce is treated for income tax purposes as if it was a gift. There are no income tax consequences to the transferring or receiving spouse, however, the recipient receives the property (appreciated stocks, real estate, etc.) at the transferor’s basis. So, the transferor and recipient would not pay income tax if appreciated stocks were transferred as part of a divorce settlement, but if the recipient sold them, the recipient could incur capital gains tax.

You should work with your lawyer and an experienced tax professional to make sure all of the tax consequences of your settlement or trial position are addressed. However, one thing you don’t have to worry about is income tax if you are the recipient of property.