Transfers from one spouse to another related pursuant to a divorce or separation agreement are tax-free transfers. The transferring spouse does not pay tax on any gain; the transferee-spouse takes over the former spouse’s basis and will eventually pay tax on that gain.
However, regulations generally limit tax-free treatment to transfers that occur within 6 years after the date the marriage ceases. Transfers after that are presumed not to be related to the cessation of a marriage, but the presumption can be rebutted.
In a recent situation, a couple divorcing agreed to own property as tenants in common. However, after the property required extensive and costly repairs that were paid by one spouse, the other spouse agreed to a buyout of her interest. This transfer occurred more than 6 years after the marriage ended. However, the divorce decree contained stipulations to cover just such occurrences, so relying on the stipulations rebutted the presumption. Bottom line: the transfer by one spouse of her interest in the property to the other spouse was a tax-free transfer (Letter Ruling 201901003).