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When are property transfers in a divorce treated as gifts?

Like nearly everyone else here in Oregon and across the country, you want to pay as little in taxes as possible. During your marriage, you probably took great care to make sure that you limited your tax liability each year. In fact, you may have even received a refund in some years.

Now that you are getting a divorce, you may wonder whether any property transfers you make as part of the divorce will come with tax ramifications. Under ordinary circumstances, that may happen, but since the transfers are occurring as part of the divorce, you may be able to escape paying taxes on those transfers.

Could those transfers be gifts?

Married couples can make property transfers between them without limit because the IRS considers them non-taxable gifts. Under the following circumstances, that same principle applies now that you are divorcing your spouse:

  • You have a court order requiring the transfer of certain property that would ordinarily create a taxable event.
  • The property transfer occurs between one year prior to and two years after your divorce is finalized, and is made in order to satisfy your settlement agreement. Of course, the transfer must meet certain criteria in order to fall under this rule and function as a non-taxable gift.
  • The amount of the transfer or transfers does not exceed the lifetime gift tax exclusion, which could change from tax year to tax year.
  • The transfer falls under the annual gift tax exclusion, which may also fluctuate from year to year.
  • If the transfer qualifies as a direct payment for medical or educational expenses, the U.S. Tax Code may consider it a gift.

Many people tend to believe that, once they execute their divorce settlements, that is it, but that most likely isn't the case. Unless you and your former spouse have a good reason to wait, it would make the most sense to take care of any transfers as soon as possible. If property transfers in accordance with a prenuptial agreement, make sure to include it in the divorce settlement in order to take advantage of a tax-free transfer.

In order to avoid the tax ramifications of property transfers, you will need to make those transfers within a certain amount of time. If you need to wait, make sure you can still transfer the property tax-free when you do. Most likely, you will have numerous questions regarding this issue. An experienced family law attorney could most likely provide you with the answers, advice and assistance you need.

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