In all ordinary cases, spouses do not owe any taxes for property transfers due to a divorce. This is controlled by two sections of the law: U.S. Code Section 1041(a) and U.S. Code Section 2516.
Under Section 1041(a), the IRS doesn’t require taxes when property transfers between former spouses if that transfer occurs “incident to the divorce.” Any transfer of property is assumed to be incident to the divorce so long as it’s either called for in the divorce settlement itself or if it occurs within one year of the end of the marriage.
Tax Basis Transfers
Any property transferred as part of a divorce keeps its tax basis. There is no step-up basis loophole in divorce proceedings. For example, say that you bought a portfolio of stocks for $200,000 during your marriage. This is its tax basis. Over the years it has appreciated, and today this portfolio is worth $500,000. During the divorce, you receive it entirely. Then you liquidate the whole portfolio for $500,000.
The IRS will consider the capital gains as $300,000 (the sale price of $500,000 less the original purchase price of $200,000). The tax basis of these assets will not have changed during the divorce. As a result, many parties in a divorce look to claim more recently acquired assets when dividing up property. These will likely have appreciated less, and as a result, will have a smaller tax basis than longer-held assets.
in the case of depreciable real estate, you are also responsible for depreciation recapture for all depreciation taken during marriage and subsequent thereto.
