Under Section 1041, all transfers of property between spouses are treated as tax-free exchanges, other than transfers to a nonresident alien spouse, certain trust transfers of mortgaged property, and transfers of U.S. Savings Bonds; these exceptions are discussed below. Section 1041 applies to transfers during marriage as well as to property settlements incident to a divorce. In a Section 1041 transfer, there is no taxable gain or deductible loss to the transferor spouse. The transferee-spouse takes the transferor’s basis in the property, and so appreciation in value will be taxed to the recipient on a later sale. This basis rule applies to all property received after July 18, 1984, under divorce or separation instruments in effect after that date.
A transfer is “incident to a divorce” if it occurs either within one year after the date the marriage ceases or, if later, is related to the cessation of the marriage, such as a transfer authorized by a divorce decree. Any transfer pursuant to a divorce or separation agreement occurring within six years of the end of the marriage is considered “incident to a divorce.” Later transfers qualify only if a transfer within the six-year period was hampered by legal or business disputes such as a fight over the property value.