The tax-free transfer rule applies to most marital assets, including cash, vehicles, real estate, investment accounts and private business interests. Although there’s generally no recognized gain or loss when assets are transferred, the spouse who receives the asset assumes its existing tax basis and holding period.
To illustrate how this works, suppose that, under the terms of your divorce agreement, you give your primary residence to your ex-spouse in exchange for keeping all the stock in your small business. This asset swap would be tax-free. However, the existing tax basis and holding periods for the home and the stock would carry over to the person who receives each asset.
Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made incident to divorce. Transfers incident to divorce are generally those that occur within:
- A year after the date the marriage ends, or
- Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.
However, transfers made more than six years after the marriage ends may still qualify in certain circumstances.
Of course, there will eventually be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — where the fair market value exceeds the tax basis — must usually recognize taxable gain when it’s sold in a taxable transaction, unless an exception applies. So it’s important to consider both current and future taxes when negotiating your divorce settlement.
