If you are going through a divorce, you will have a property settlement agreement that determines how marital assets get distributed between the parties.
You typically do not recognize gain or loss in a transfer of property to a former spouse due to the dissolution of marriage. Exceptions include transfers to trusts, certain stock redemptions and if your spouse is a nonresident alien. You should be aware of the tax treatment for some additional items.
Stock options
If you agree to transfer nonstatutory stock options or nonqualified deferred compensation as part of your property settlement, you do not report income as a result of the transfer. Your spouse recognizes income when exercising the options or receiving deferred compensation.
Passive activity asset
If you have an investment in a passive activity, you are probably accruing any losses associated with the holding. Your transfer of a passive activity investment under a divorce ceases your ability to deduct accrued losses from the activity. Your spouse gets an increased basis in the passive activity equivalent to unused losses.
Property with investment credit
If you own property that has an investment credit, you usually have to recapture the credit on the asset’s disposition. If you transfer the property pursuant to your divorce, you do not have to recapture the credit. Instead, the spouse receiving the property reports the recapture if they sell the asset during the recapture period.
In negotiating your property settlement agreement, you need to consider the tax effects of the distributions and payments required under the arrangement.