Are there special rules that apply to transfers of property, such as sales, between husbands and wives? In fact, there are special rules in general treating such transfers as gifts. These rules apply to transfers between married spouses and apply as well to transfers between ex-spouses related to their divorce.

This is a “nonrecognition” rule that is non-elective. That is, where one spouse sells property to another, no gain or loss on the sale is “recognized” (reported, for tax purposes), even if the parties would prefer to report it. Any payment made for the transferred property is ignored for tax purposes. And the basis (cost) of the property remains unchanged.

 Example: Frank owns land in which his basis is $10,000. He sells it to his wife Susan for $18,000, its fair market value. Frank does not report any gain on the sale. Susan is the new owner, but her basis is $10,000 (Frank’s basis), even though she actually paid $18,000 for it.

Note that the “buying” spouse gets the “selling” spouse’s basis in the property even if it’s higher than the property’s value (say the value was just $5,000 in the above example). In this regard, the spousal transfer rule differs from the gift rules. With an actual gift (to a nonspouse donee), if the donor’s basis is higher than its value at the time of the gift, the donee receives a “dual” basis: the higher figure as basis for purposes of computing gain and the lower figure for purposes of computing loss.

The spousal transfer rules apply to married couples and to transfers “incident to divorce.” A transfer is incident to divorce if made within one year of the end of the marriage or (even if later) if it relates to the end (e.g., if the transfer is called for in the divorce decree but only occurs after a year). Thus, if one spouse transfers property to the other in settlement of marital rights, the transferring spouse has no gain or loss on the transfer and the basis carries over.

The spousal transfer rules discussed above also apply to transfers to a spouse or former spouse, incident to divorce, of nonstatutory stock options and/or rights to nonqualified deferred compensation that an individual has received as compensation for employment and that haven’t yet been reported as income. The spousal transfer rules make the transfers themselves nontaxable events and (except where certain pre-November 9, 2002 divorce agreements or divorce-related court orders provide otherwise), also mean that the transferor isn’t subject to income tax on the income attributable to the transferred items (although that income is treated as the transferor’s wages for Social Security tax purposes). Instead, the spouse or former spouse must recognize that income when he or she exercises the stock options or when the deferred compensation is paid or made available to him or her.

Exceptions. There are several narrow exceptions to the above rules. Two of them apply when property is being transferred into a trust by one spouse for the benefit of the other spouse (or incident to divorce). First, gain will be recognized if (and to the extent that) the amount of debt to which all of the property transferred is subject exceeds the basis of the property. The second exception is for installment notes transferred into the trust: gain would be recognized as if the note were disposed of to an unrelated party. The last exception applies to U.S. savings bonds, Series E and EE: if these are transferred to an ex-spouse as part of a divorce settlement, the transferor must report the interest that has accrued on the bonds (that hasn’t already been reported).