What is Phase 1041?
Phase 1041 of the Inside of Source of revenue Code that mandates that any transfer of property from one spouse to a couple different is income tax-free. No deductible loss or taxable reach can be declared. This section applies to transfers throughout marriage along with throughout the divorce process. Phase 1041 used to be as soon as enacted with the intention to simplify the consolidation of marital property.
Figuring out Phase 1041
Phase 1041 does no longer practice to transfers to nonresident-alien spouses and most probably transfers of mortgaged property between trusts or transfers of U.S. monetary financial savings bonds. This section moreover places the tax burden on the recipient of any transfer of marital property incident to a divorce (the property is treated as a gift); because of this truth, it can be throughout the interest of a divorcing spouse to negotiate for property that have minimal taxable appreciation. 
How Phase 1041 Works
The guideline of thumb applies previous merely property. The IRS provides this example: If a husband transfers a fishing permit, that has a basis to the husband of $100,000, to his partner, there can also be no reach or loss on the transfer. In addition to, the partner’s basis throughout the fishing permit will be the an identical for the reason that husband’s basis, or $100,000. The partner’s basis throughout the permit can also be $100,000 regardless of the amount she will have paid to the husband for the permit (assuming the transfer used to be as soon as inside of the kind of a sale as opposed to a gift).
In relation to divorce, the property is thought of as incident to the divorce if the transfer occurs within three hundred and sixty five days after the date on which the marriage ceases, or is alleged to the cessation of the marriage.
In circumstances of transfers in imagine where felony accountability exceeds the cost basis, the no-gain, no-loss rule is set aside to the extent that the sum of the amount of the liabilities assumed, plus the amount of the liabilities to which the property is topic, exceeds the entire of the adjusted basis of the property transferred.
If the spouse (or former spouse) of the individual making the transfer is a nonresident alien, the tax-free exemption does now not practice.
Phase 1041 does now not communicate to the tax consequences of asset transfers involving the suitable to acquire income harking back to the transfer of a bond or CD and accrued interest however to be paid and contingent fees or deferred repayment, notes tax felony skilled David Klasing. In addition to, a qualified house relation order overrides Phase 1041 throughout the distribution of property harking back to pensions and retirement plans.
