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Property Equalization Payments May Be Limited In Marital Settlement Agreements

 

Individuals going through a divorce should be informed of the tax implications of a divorce, particularly in property equalization. Per 26 Code of Federal Regulations (C.F.R.) § 1.1041-1T, if a transfer of property is due to a divorce and between spouses, generally no tax gain or loss is recognized on the property.

To be eligible for this tax treatment, the transfer of property must occur within one (1) year of the divorce or the transfer must be directly related to the divorce (including Court-ordered property equalization). Those ordered to pay property equalization, however, need to be aware that the payments must be made within six years of the decree of divorce. After that, the tax treatment will not apply, unless it can be shown that:

(a) the transfer was not made within the one- and six-year period 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.

Annulments and marriages later annulled as void also count as a “cessation of marriage” for this section. Additionally, transfers of properties to third parties may also qualify in three situations: (1) If the transfer is required by the divorce decree; (2) If the transfer is made pursuant to a written request of the other spouse; or (3) If the transferring spouse receives a written consent to the transfer from the other spouse. 

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