If you are married, take a deep breath. There is no time limit on interspousal transfers of property while you are still married. If you are divorced or thinking about a divorce, there are some time limits. If you transfer the property after the time limit, you may be paying avoidable taxes.
Interspousal Transfer Deed
An interspousal transfer deed is a way to transfer interests in property. The transfer can take place during the marriage, during separation or after divorce. It is used in some community property states to turn community property into separate property.
Property can be transferred at any time. There can be federal, state or local tax advantages to transferring property between spouses instead of between two unrelated people. The "time limit" is the amount of time after the divorce that the property can be transferred and still get the tax benefit.
Federal Tax on Real Property
When you sell real property and realize a gain, the Internal Revenue Service requires that the gain be included as taxable income. The IRS provides an exclusion for the sale of a primary residence with a gain up to $250,000. Homeowners who qualify do not experience any tax consequence from the sale or transfer of their home for this reason. For that mansion, investment property or vacation cottage, you have to pay tax on the gain when you sell it.
Federal Time Limits
The IRS has exceptions to the rule. No gain is recognized if the transfer is between spouses. There is also an exception for property transferred after divorce, but there are time limits. The property has to be transferred within one year after divorce. If the transfer is pursuant to a written settlement agreement, you have six years to transfer the property. If the transfer is outside those time limits, it is presumed to be unrelated to the marriage and taxable.
State and Local Time Limits
State and local governments also collect taxes from real estate transfers. They can set any time limit on the the transfer of property to receive any available tax benefits. There may be no transfer tax exclusion for transfers between spouses, such as in Chicago. There could be an exclusion but with a different time limit than the federal limit. California, for example, requires that the transfer deed be filed within four years after divorce to avoid reassessment.
Finding State and Local Rules
Check your local ordinances and state laws regarding real estate transfer taxes to identify any exclusions available in your area. The office where deeds are recorded in your area is another good place to check for information. The Register of Deeds or Recorder of Deeds are common names for this office.
- HG.org: Tax Issues When Dividing Property Incident to Divorce
- IRS: Publication 504 (2011), Divorced or Separated Individuals
- IRS: Publication 523 (2011), Selling Your Home
- City of Chicago: Real Property Transfer Tax (7551)
- California State Board of Equalization: Property Tax Rules
- California State Board of Equalization: Special Topic Survey, Changes In Ownership and New Construction
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