This valuable series on Dividing Property In A Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.
Dividing property during divorce may be one of the most difficult issues faced by tax planners. While most professionals are familiar with the general rule that property transferred during marriage and/or divorce proceedings is usually tax free , they may be less aware of the many thorny tax pitfalls that await the unwary. As with most tax matters, “the devil is in the details”. Issues such as how property is held, basis, depreciation, tax credit recapture, and holding period, are but a few of the problems that will confront tax practitioners in a divorce engagement.
Sometimes the tax impact of decisions made during divorce proceedings will not be realized, much less recognized, until many years down the road. Other times, the tax consequences may be just around the corner. The purpose of this course is to arm practitioners with the knowledge that will help them see what is coming down that road, or around that corner… while there is still time to do something about it.
I. The Big Rule – Code Section 1041 Overview
A. The Exchange of property between spouses and former spouses is generally tax free. If the property transfer is between former spouses, it must be incident to their divorce.1 Note: Code section 1041 is mandatory. There is no electing out of it. It also applies to the nonrecognition of loss as well as gain.
B. Transfer of property is incident to divorce if it: