Tax question

There are no immediate tax ramifications. Property divisions incident to divorce, as I recall, don't have any tax implications at that time.

When taxes will come into play is when you go to sell the buildings. Because I believe you carry over the basis you had when both people owned the property.

So for example, say each property now is worth $1,000,000. You bought one for $100,000, and the other for $500,000. When the buildings are later sold (say for $1,000,000 each), the owner of the older property will have a $900,000 capital gain, while the owner of the newer property will only have a $500,000 capital gain, and pay much lower taxes.

-- Stu

OK, but you forgot about depreciation.

Right. Thanks. I was just trying to keep things simple. But depreciation is important. It reduces the basis of property, and must be recaptured when property is sold (whether it was actually taken or not).

What about when the spouse receiving the property is a non-resident alien? From IRC 1041

BEGIN QUOTE

(d) Special rule where spouse is nonresident alien Subsection (a) shall not apply if the spouse (or former spouse) of the individual making the transfer is a nonresident alien.

(a) General rule No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)? (1) a spouse, or (2) a former spouse, but only if the transfer is incident to the divorce.

(b) Transfer treated as gift; transferee has transferor?s basis In the case of any transfer of property described in subsection (a)? (1) for purposes of this subtitle, the property shall be treated as acquired by the transferee by gift, and (2) the basis of the transferee in the property shall be the adjusted basis of the transferor.

END QUOTE

(d) seems to mean that if the receiver of property if a nonresident then the rule (a), which means no gain/loss recognized will apply.

But in this case there I suppose (b) still applies, and then is the transfer considered a gift? If yes, then who pays the gift tax?

Here's my understanding:

1. A transfer of property to a nonresident alien spouse incident to divorce is a taxable transaction. The person transferring the property treats it as a disposition and reports the gain or loss and computes the income tax consequence of the disposition.
2. As long as the division of property is identified in the divorce, it is considered a nonvoluntary transfer and as such, there can not be a gift.
3. If we are dealing with the main home being transferred to a nonresident alien, the spouse making the transfer may avail him/herself of the main home sale exclusion if the tests are met.