Incedent to a Divorce

[Kram BergGold]

Client's owned a second home. In 2008 they got divorced. In 2012 one spouse bought the other's 50% interest in this house. There was no mention of how to deal with this house in the divorce agreement. Since this transfer occured within 6 years, is this incident to a divorce or for it to be incident, does it have to be within 6 years and made mention of in the divorce agreement?

[Bees Knees]

Transfers between former spouses if incident to divorce are not taxable. Thus, if the transfer between former spouses is NOT incident to divorce, such transfer would be considered a taxable transfer. Obviously, therefore, you want this to qualify as a transfer incident to divorce.

To qualify as a transfer incident to divorce, TTB, page 12-11 says the following:

Transfers are incident to divorce if they are:
• Made within one year after the date the marriage ends, or
• Related to the ending of the marriage—made under an original
or modified divorce or separation instrument within six years
after the date the marriage ends. Transfers that do not meet
these conditions are presumed not to be related to the ending of
the marriage, but see Regulation Section 1.1041-1T (Q&A 7) and
PLR 200442003 for information on rebutting the presumption.

Reg. §1.1041-1T (Q&A 7) says:

A–7: A transfer of property is treated as related to the cessation of the marriage if the transfer is pursuant to a divorce or separation instrument, as defined in section 71(b)(2), and the transfer occurs not more than 6 years after the date on which the marriage ceases. A divorce or separation instrument includes a modification or amendment to such decree or instrument. Any transfer not pursuant to a divorce or separation instrument and any transfer occurring more than 6 years after the cessation of the marriage is presumed to be not related to the cessation of the marriage. This presumption may be rebutted only by showing that the transfer was made to effect the division of property owned by the former spouses at the time of the cessation of the marriage. For example, the presumption may be rebutted by showing that (a) the transfer was not made within the one- and six-year periods described above because of factors which hampered an earlier transfer of the property, such as legal or business impediments to transfer or disputes concerning the value of the property owned at the time of the cessation of the marriage, and (b) the transfer is effected promptly after the impediment to transfer is removed.

So in your situation, since the transfer was not mentioned as a requirement in the divorce or separation instrument (or any modification after), it is presumed to be not related to the cessation of the marriage, unless you can rebut this presumption.

Your situation is not identical to the one mentioned in the example, however, I think you might be able to argue it another way. Ask the client why did they continue to own a second home jointly after the divorce? Was it their intent at the time of the divorce for one to sell his/her interest in the house to the other as part of the divorce settlement? Or did they intend to jointly own the house after the divorce for an indefinite period of time, and then later decided on their own to end the joint ownership?

If it was always their intent to split the asset when one of them could raise the money to buy out the other but it was never written into the divorce papers, you might be able to rebut the presumption by showing that the transfer was made to effect the division of property owned by the former spouses at the time of the cessation of the marriage.