TAX TREATMENT OF PROPERTY TRANSFERRED between SPOUSES IRC §1041 Since 1984 there has been Special Treatment for Property Transferred INCIDENT TO A DIVORCE I. Overview of Internal Revenue Code §1041. Section 1041 of the Internal Revenue Code, enacted in 1984, provides that there shall be no recognition of gain or loss upon transfer of property from one spouse to or on behalf of the other spouse during marriage or incident to divorce. Included transactions avoid both income tax (on a sale or exchange) and gift tax (if there is little or no consideration in the form of property or rights.) It also avoids other tax problems related to local property taxes, transfer of installment notes, incentive stock options, depreciable property, investment credit recapture for property acquired before 1986 and passive losses. It applies to separate and community property and transfers between spouses’ corporations. Non recognition of gain/loss is mandatory between spouses and ex spouses, up to one year after the date of termination of marital status. Transfers within six years of the divorce may qualify if they are “incident to the divorce. “ Section 1041 was created to eliminate tax on marital settlements but actually affects all interspousal transfers without regard to divorce. Some transfers to a spouse remain taxable, for example: a. Transfers to a trust for the benefit of the spouse would be taxable unless it is a grantor/revocable trust, such as a “living trust" b. A transfer to a non-resident alien spouse would be taxable. With planning, it is possible to avoid 1041 non-tax treatment when one party wants to recognize gains to increase basis for depreciation or deduct losses.