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recommend that a transferee spouse try
A tax practitioner to obtain this before the divorce is final- The goal in dividing
ized, as attempting to obtain it later may
can greatly help prove to be more difficult. If this is not the assets is to
people in divorce by possible, an adviser should recommend provide each
reducing the overall to the transferee spouse to consider party with the best
including this requirement in the final
stress of the divorce documents to allow for enforcement, if opportunity for
process and providing necessary, as the regulations provide no financial success in
penalty for noncompliance. By having
the clarity they the cost basis prior to the final dissolu- the future.
need to make good tion, advisers will be able to estimate any
potential tax liability of the asset clients
financial decisions are receiving as well as have the infor- that use time as their own. Note that
for their future. mation for reporting any future sale. voluntarily moving out will not count,
as it needs to be part of the agreement.
Planning for the principal In summary, Sec. 121 provides many
to the wife. This right of first refusal residence opportunities to minimize tax on a per-
was exercised within the six-year time The principal residence is a typical asset sonal residence for divorcing couples,
frame, and the husband “purchased” the that is discussed and awarded during a and this can extend to planning for
home from his former spouse. The IRS divorce. Sec. 121 allows joint filers to couples with multiple residences.
indicated that it was not a purchase and exclude up to $500,000 of gain on the
sale but a nontaxable transfer under sale of a residence, and individual filers Dividing retirement plans
Sec. 1041. This resulted in the wife’s re- can exclude up to $250,000 of gain. This Retirement plans come in many forms
ceiving nontaxable cash from the “sale” can provide a tax planning opportunity and are also a common asset to be
of the home and the husband’s receiv- for some divorcing couples. For joint discussed and divided in a divorce.
ing the home with the wife’s basis — filers to qualify for the exclusion, one “Qualified” plans include pension and
likely not the result he was hoping for. party needs to have owned the residence, profit-sharing plans, such as defined
Being able to qualify for nonrecog- and both parties need to have used the benefit plans, Sec. 401(k) plans, and Sec.
nition of income under Sec. 1041 at residence as their principal residence for 403(b) plans. These employer-provided
the time of a divorce makes the divi- a total of two out of the last five years. plans are governed by the Employee Re-
sion of assets much easier but leads to Sec. 121 provides very favorable tirement Income Security Act of 1974
certain longer-term tax consequences. treatment for parties in divorce to as- (ERISA), P.L. 93-406, as amended,
Since the assets have carryover basis, sist them in meeting the ownership which provides that these types of plans
the potential tax liability has only been and use tests. First, to help meet the cannot be assigned from one spouse to
deferred. Looking at the potential tax ownership test, Sec. 121(d)(3)(A) al- the other without a qualified domestic
liability of all the assets that are being lows the residence transfer from one relations order (QDRO). The require-
divided from the marital community spouse to the other spouse to include ments of a QDRO are listed in Sec.
can help to make the asset division the holding period. This would allow 414(p), and failure to follow them can
more equitable as well as eliminate po- the receiving spouse to count any own- have adverse tax consequences. Once
tential surprises for the parties later. ership time of the transferor spouse as the divorce court produces the order
Since any asset received will have the receiving spouse’s own. Sec. 121(d) to assign some or all of the retirement
carryover basis, it is important to obtain (3)(B) helps the parties meet the use account to the spouse (alternate payee),
the basis information as soon as possible. test by allowing an individual to be and the qualified plan administrator has
Temp. Regs. Sec. 1.1041-1T indicates treated as using property during any determined it meets the conditions of
that the transferor of property under Sec. period of ownership while their spouse Sec. 414(p) and signs the document, you
1041 must provide the transferee with or former spouse is granted use of the have a QDRO. The retirement account
sufficient records to determine the cost property under a divorce or separation will now be divided between the parties
basis, holding period, and other tax in- instrument. So, if one party is given as provided in the QDRO.
formation relating to the property at the temporary use of the home in a divorce An individual retirement account
time of the transfer. An adviser should instrument, the other party can count (IRA) is not covered under ERISA

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