Home Transfer in Divorce 2026: Section 1041, Basis, Recapture
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Quick Answer
As of October 30, 2026, moving a home or a rental to a spouse or former spouse in a divorce creates no gain or loss for either of them, but the tax does not go away: the receiving spouse takes the giver’s adjusted basis, not the market value, and pays when the property is sold. Section 1041(a) says “No gain or loss shall be recognized” on a transfer to a spouse or to a former spouse “incident to the divorce,” and 1041(b) treats the property as acquired “by gift” with the transferor’s basis. Treas. Reg. 1.1041-1T (Q&A-11) applies that basis “even if the transfer is a bona fide sale.” For a main home, the receiver adds the giver’s ownership time (121(d)(3)(A)) but must meet the residence test alone (Pub. 523) and gets one exclusion of $250,000, not $500,000. For a rental, depreciation “allowed or allowable to the taxpayer or to any other person” travels with it (1250(b)(3)). This is analysis of public documents, not investment, legal or tax advice.
Key Takeaways
- At the transfer nobody is taxed: the transferor “recognizes no gain or loss on the transfer even if the transfer was in exchange for the release of marital rights or other consideration” (Treas. Reg. 1.1041-1T, Q&A-10). It applies to a transfer within 1 year after the marriage ends, or one related to the end of the marriage (1041(c)).
- The transferee’s basis is the transferor’s “adjusted basis of such property in the hands of the transferor immediately before the transfer” (Q&A-11). Paying cash for the other spouse’s half does not raise it to cost. Pub. 523 says a co-owned home starts at your half-share’s basis plus your spouse’s half-share’s basis.
- Main home: the receiver counts the giver’s ownership time (121(d)(3)(A); Treas. Reg. 1.121-4(b)(1)) but “must meet the residence requirement on your own” (Pub. 523). A spouse who moved out is treated as using the home as a principal residence while the other spouse is granted use under a divorce or separation instrument (121(d)(3)(B)).
- The exclusion is $250,000 for an unmarried seller and $500,000 only on a qualifying joint return (121(b)(1), (2)(A); Pub. 523). In our arithmetic, a $900,000 home with a $300,000 basis that one ex-spouse keeps and later sells leaves $350,000 taxable, against $100,000 if it had been sold while the two could still use the joint exclusion or sold together after the divorce with each using $250,000.
- Rental property: depreciation “allowed or allowable to the taxpayer or to any other person” is part of the recapture math (1250(b)(3); 1245(a)(2)(A)), and the giver owes nothing at a gift because 1250(d)(1) and 1245(b)(1) switch recapture off for a gift. Pub. 544 says the donee must take into account the depreciation the donor deducted. The 25% rate on unrecaptured section 1250 gain is a maximum (1(h)(1)(E)).
- Unused passive losses on a transferred rental cannot be deducted by the giver; the receiver increases the adjusted basis by the unused losses (Pub. 504, Table 5; 469(j)(6)).
- Filing status moves the same gain into a different place on the 2026 table: the 0% ceiling is $98,900 on a joint return and $49,450 for an unmarried filer, and the 3.8% net investment income tax starts at $250,000 of modified adjusted gross income on a joint return and $200,000 for other filers (Rev. Proc. 2025-32; 1411(b)). Marital status is fixed at the close of the tax year (7703(a)(1)).
CSV · 80 rows
Home and rental property transfers in divorce: sections 1041 and 121, recapture rules and 2026 rate thresholds
80 rows: the text of 1041, 121(d)(3), 1245, 1250, 1(h), 469(j)(6), 1223, 7703 and 1411; Treas. Reg. 1.1041-1T Q&A and 1.121-4(b); Pub. 504, 523, 527 and 544 wording; the Schedule D and Form 1099-S instructions; and the 2026 capital gains thresholds, each with its link.
What section 1041 does at the transfer, and what it leaves behind
Section 1041 is a deferral rule, not an exemption. The row that matters for money is the last one: the tax moves to whoever holds the property when it is sold. The table puts each effect next to the paragraph it comes from.
| Question | Answer | Where it comes from |
|---|---|---|
| Is the giver taxed on the transfer? | No gain or loss, even if the transfer is in exchange for the release of marital rights or other consideration, and including an equal or unequal division of community property | 1041(a); Treas. Reg. 1.1041-1T, Q&A-10 |
| Is the receiver taxed on receiving it? | No. The property is treated as acquired by gift | 1041(b)(1); Pub. 504 |
| What is the receiver’s basis? | The transferor’s adjusted basis immediately before the transfer, whether that is less than, equal to or greater than market value or the price paid | 1041(b)(2); Q&A-11; Pub. 504 |
| Does a loss carry over too? | Yes. The basis rule applies “for purposes of determining loss as well as gain,” which differs from the ordinary gift rule in 1015(a) | Q&A-11 |
| What if the mortgage exceeds the basis? | Still no gain to the giver, and the basis stays the adjusted basis. In the regulation’s example a $10,000 property with a $1,000 basis and a $5,000 loan passes with a $1,000 basis | Q&A-12; Pub. 504 |
| Does the holding period carry? | Yes. The period the other person held the property is included when the basis is the same in whole or in part | 1223(2) |
| Who must hand over the records? | The transferor “must, at the time of the transfer, supply the transferee with records sufficient to determine the adjusted basis and holding period” | Q&A-14; Pub. 504 |
| Is Form 1099-S needed? | No. The instructions list a gift, “including a transaction treated as a gift under section 1041,” among transactions that are not a sale or exchange for 1099-S purposes | Instructions for Form 1099-S |
| Where does the tax go? | To whoever sells later, on the gain measured from the carryover basis | 1041(b); our reading |
Source: 26 U.S.C. 1041 and 1223 (Cornell Legal Information Institute); Treas. Reg. 1.1041-1T (Cornell, eCFR text); IRS Pub. 504 (2025); Instructions for Form 1099-S. Read and saved October 30, 2026.
Two details are easy to miss. First, Q&A-2 says section 1041 is “not limited to transfers of property incident to divorce”: it covers any transfer between spouses, including an arm’s-length sale, and a divorce does not need to be coming. Second, the rule is not optional. We found no election out of it in the Code or in the regulation, so a couple cannot choose to have the giver pay tax and the receiver step up to market value (our reading).
Is the transfer “incident to the divorce”?
Between spouses, the rule applies without any divorce test. For a former spouse it applies “but only if the transfer is incident to the divorce” (1041(a)(2)). The deadlines are where mistakes happen.
| Fact pattern | Result | Source |
|---|---|---|
| Transfer within 1 year after the date the marriage ends | Incident to the divorce, whether or not it relates to the marriage ending | 1041(c)(1); Q&A-6; Pub. 504 |
| Transfer made under the original or a modified divorce or separation instrument, within 6 years after the marriage ends | Treated as related to the end of the marriage | Q&A-7; Pub. 504 |
| Transfer later than 6 years, or not under an instrument | Presumed not related. The presumption can be rebutted by showing the transfer divided property the former spouses owned when the marriage ended, for example because legal or business impediments or a valuation dispute held it up and it was done promptly afterwards | Q&A-7; Pub. 504 |
| Property acquired after the marriage ended | Can still qualify | Q&A-5; Pub. 504 |
| Receiving spouse is a nonresident alien | 1041(a) does not apply; gain is recognized (assuming no other nonrecognition rule applies) | 1041(d); Q&A-3 |
| Property goes into a trust and the liabilities exceed the adjusted basis | Gain is recognized to the extent liabilities exceed basis. Pub. 504 example: a $12,000 property with a $1,000 basis and a $5,000 liability gives $4,000 of gain | 1041(e); Pub. 504 |
| Transfer to a third party, such as a buyer, on behalf of the spouse | Treated as two transfers if the instrument requires it, the spouse asks in writing or consents in writing before the giver files that year’s return. The first is protected; the second, from the spouse to the third party, is not | Q&A-9; Pub. 504 |
Source: 26 U.S.C. 1041; Treas. Reg. 1.1041-1T, Q&A-3 to Q&A-9; IRS Pub. 504 (2025). Read and saved October 30, 2026.
A note on the paper. Q&A-7 defines the instrument by reference to “section 71(b)(2).” Congress repealed section 71 in 2017 (Pub. L. 115-97), and the same law struck that cross-reference from section 121(d)(3)(B) and added subparagraph (C) with its own three-part definition, for instruments executed after December 31, 2018. The temporary regulation was not rewritten. In our reading the practical test is the same one Pub. 504 states: a transfer under the original or modified divorce or separation instrument. Whether a post-2018 instrument must fit the new 121(d)(3)(C) list for the 6-year rule is a point we did not find the IRS addressing. Treat the date in the decree and the date on the deed as the numbers to check.
The home: ownership, residence and one exclusion
A home sale is where the largest sum is usually at stake, and the divorce changes three inputs of the section 121 test. Our home-sale exclusion guide covers the basic two-out-of-five-years rule; this section covers what the divorce adds.
| Input | Rule when a spouse or former spouse is involved | Source |
|---|---|---|
| Ownership | A person who receives the home in a 1041 transaction counts the time the giver owned it | 121(d)(3)(A); Treas. Reg. 1.121-4(b)(1); Pub. 523 |
| Residence by the receiver | No tacking. “You must meet the residence requirement on your own” | Pub. 523 |
| Residence by the one who moved out | Treated as using the home as a principal residence during any period of ownership while the spouse or former spouse is granted use under a divorce or separation instrument. The regulation adds that this counts only if that person uses the property as a principal residence | 121(d)(3)(B); Treas. Reg. 1.121-4(b)(2); Pub. 523 |
| Which papers count | A divorce or separate maintenance decree or a written instrument incident to it; a written separation agreement; or a support or maintenance decree not covered by the first | 121(d)(3)(C); Pub. 523 |
| Dollar limit | $500,000 only if the return is a joint return, either spouse meets ownership, both meet use and neither is barred by the once-every-2-years rule. Otherwise $250,000 each. On a joint return that does not qualify, the limit is the sum of what each spouse would have alone | 121(b)(1), (2)(A), (2)(B); Pub. 523 |
| Once every 2 years | No exclusion if another sale used it in the 2 years before | 121(b)(3) |
| Non-resident years | Years after 2008 when neither the taxpayer nor the spouse or former spouse used the home as a principal residence can be nonqualified use, with the exception for time after the last day of use | 121(b)(5)(C); Pub. 523 |
| Depreciation | The exclusion does not cover gain up to depreciation taken after May 6, 1997 | 121(d)(6) |
| Filing status at year-end | Whether you are married is decided at the close of the tax year | 7703(a)(1) |
Source: 26 U.S.C. 121 and 7703; Treas. Reg. 1.121-4(b); IRS Pub. 523 (2025). Read and saved October 30, 2026.
Worked example: three ways to split a $900,000 home (our arithmetic)
Assume a couple owns a home jointly, 50/50, with a combined adjusted basis of $300,000 (price plus improvements). It is worth $900,000. Both have lived there more than 2 of the last 5 years, nobody used the exclusion in the last 2 years, and we ignore selling costs and state tax. The gain is $900,000 minus $300,000, or $600,000.
| Path | Whose basis and exclusion | Taxable gain (our arithmetic) |
|---|---|---|
| A. Sell to a buyer while still married at year-end and file jointly | Joint basis $300,000; $500,000 exclusion if the 121(b)(2)(A) conditions are met | $600,000 minus $500,000 = $100,000 |
| B. Sell to a buyer after the divorce, each reporting half | Each half gain is $300,000; each uses up to $250,000 if each meets ownership and use (the spouse who moved out relying on 121(d)(3)(B)) | $50,000 each, $100,000 in total |
| C. One spouse takes the other’s half by a 1041 transfer for $450,000 cash, and sells for $900,000 later | Receiver’s basis $150,000 own half plus $150,000 carryover = $300,000; one $250,000 exclusion, and the receiver must meet the residence test alone | $600,000 minus $250,000 = $350,000 |
Path C leaves $250,000 more of gain taxable than paths A and B, and all of it falls on the spouse who kept the house. At a 15% federal rate that is $37,500, at 20% it is $50,000, and if the 3.8% net investment income tax applies to that slice it adds $9,500 (our arithmetic; the real result depends on the receiver’s taxable income). The spouse who left gets $450,000 in cash and owes nothing on it. In other words, a $450,000 check and a half-share of this house are not the same value after tax. Our net investment income tax guide explains where the 3.8% starts.
The result changes with the facts: a receiver who has lived in the home 20 years may have little growth to worry about, a home with large improvements has a higher basis, and a receiver who has not met the 2-year tests can get a partial exclusion only if the sale is for a reason in 121(c); Pub. 523 lists divorce or legal separation among the events.
The rental: what travels with it
When the property is a rental, three records move to the receiver: the adjusted basis, the depreciation already taken and any unused passive loss. The giver reports the rental income or loss “until the property is transferred,” and the receiver reports it afterwards (Pub. 504, Table 5).
| Item | At the transfer | At the receiver’s later sale | Source |
|---|---|---|---|
| Gain built into the property | Not recognized by the giver | Taxed to the receiver from the carryover basis | 1041(a), (b) |
| Depreciation on the building (residential, straight line) | No recapture for a gift: “Subsection (a) shall not apply to a disposition by gift” | Counts toward unrecaptured section 1250 gain, taxed at up to 25%; “depreciation adjustments” include deductions allowed or allowable “to any other person” | 1250(d)(1), (b)(3); 1(h)(1)(E), (h)(6); Pub. 544 |
| Depreciation on equipment, appliances and other section 1245 property | No recapture for a gift | Gain up to all depreciation, including the giver’s, is ordinary income. Pub. 544 lists depreciation “a previous owner” claimed when your basis follows that person’s | 1245(b)(1), (a)(2)(A); Pub. 544 |
| Bonus depreciation | None at the gift | A 100% allowance (168(k)(1)(A) as it now reads) is part of the depreciation that comes back as ordinary income if taken on section 1245 property | 168(k)(1)(A); 1245 |
| Unused passive losses | The giver cannot deduct them | The receiver adds them to basis; they are not otherwise deductible | 469(j)(6); Pub. 504, Table 5 |
| Holding period | Carries over | Combined period counts, so a short ownership by the receiver can still be long term (our reading) | 1223(2) |
| Depreciation clock | Not covered in the list of 168(i)(7)(B) transactions where a transferee steps into the transferor’s depreciation; we found no IRS rule for a 1041 transfer | Ask the preparer how the receiver will continue depreciation | 168(i)(7)(B); our reading |
| Basis for depreciation | Not cost | Pub. 527 lists property received “from your former spouse as the result of a divorce” among property for which you can’t use cost as the basis and points to Pub. 551 | Pub. 527 |
Source: 26 U.S.C. 1, 168, 469, 1223, 1245 and 1250; IRS Pubs. 504, 527 and 544 (2025). Read and saved October 30, 2026.
Our depreciation recapture guide explains the 25% ceiling and the Form 4797 steps in detail; our bonus depreciation guide shows why a cost-segregated rental carries more ordinary-income recapture than a plain one.
Worked example: a rental that moves in the divorce (our arithmetic)
Assume one spouse bought a rental for $400,000 ($80,000 land, $320,000 building) and has been allowed $116,000 of straight-line depreciation, so the adjusted basis is $284,000. At the divorce it is worth $600,000 and moves to the other spouse by a 1041 transfer. The receiver later sells it for $700,000.
- At the transfer. The giver recognizes no gain on the $316,000 built into the property ($600,000 minus $284,000). Had the giver sold to a stranger for $600,000, that $316,000 would have been the giver’s gain.
- Basis. The receiver’s basis is $284,000. If the receiver paid $300,000 for the property, the basis is still $284,000 (Q&A-11).
- At the later sale. The gain is $700,000 minus $284,000 = $416,000. Of that, $116,000 is unrecaptured section 1250 gain (the depreciation, which is smaller than the gain) taxed at no more than 25%, which is at most $29,000. The other $300,000 is taxed at 0%, 15% or 20%: $45,000 at 15%, $60,000 at 20%. The federal income tax on the sale is therefore at most between $74,000 and $89,000 on these assumptions.
- Net investment income tax. If it applies, the maximum is 3.8% of $416,000, or $15,808. Net gain from the disposition of property is net investment income unless the property was held in a trade or business that is not passive (1411(c)(1)(A)(iii), (c)(2)), so whether it applies depends on how the rental is classified and on income above the threshold.
The depreciation the giver took reaches the receiver’s return, and the receiver pays tax on gain the giver earned. A settlement that values the rental at $600,000 on both sides of the ledger overlooks that. A tax adviser or the court can price the built-in tax at the receiver’s bracket (an inference, not a rule).
Filing status and the 2026 numbers
Divorce changes the table the same gain is taxed on. Marital status is decided on the last day of the tax year (7703(a)(1)), so a divorce final on December 31, 2026 makes the person unmarried for the whole of 2026.
| 2026 item | Joint return | Unmarried (single) | Head of household | Married filing separately |
|---|---|---|---|---|
| Top of the 0% long-term gain rate (taxable income) | $98,900 | $49,450 | $66,200 | $49,450 |
| Top of the 15% rate (taxable income) | $613,700 | $545,500 | $579,600 | $306,850 |
| Net investment income tax starts at modified adjusted gross income of | $250,000 | $200,000 | $200,000 | Half of the joint amount |
| Home-sale exclusion | Up to $500,000 if the 121(b)(2)(A) tests are met | $250,000 | $250,000 | $250,000 |
Source: Rev. Proc. 2025-32 section 4.03 (Maximum Capital Gains Rate); 26 U.S.C. 1411(b) and 121(b); IRS Pub. 523 (2025). Read and saved October 30, 2026. Head-of-household rows for the net investment income tax follow 1411(b)(3), “any other case.”
The 20% rate and the 25% unrecaptured section 1250 rate sit above these ceilings. The 3.8% tax is separate and is explained in our net investment income tax guide linked above.
Decision points
- Who will sell, and when? If the home will be sold anyway, a sale to a third party before the divorce year ends, or after the divorce with both owners reporting their share, keeps two exclusions in play. A transfer to one spouse, then a sale, keeps one.
- Price the built-in tax. For a house that has gained a lot, or a rental with a lot of depreciation, ask what the receiver will owe at the sale, and compare with cash or retirement money that has a known tax cost. Our QDRO and IRA transfer guide shows the same exercise for retirement accounts.
- Get the records at signing. Basis, improvements, the depreciation schedule and any suspended passive loss. The regulation puts that duty on the giver at the time of the transfer (Q&A-14).
- Mind the dates. One year after the marriage ends, six years under an instrument, and December 31 for filing status.
- Write who uses the home. The deemed-use rule in 121(d)(3)(B) depends on a divorce or separation instrument that grants use.
What a reader can do with this
- List every real property and write down, for each, the adjusted basis, any depreciation taken and any suspended passive loss.
- For the home, ask who will sell and by when; run paths A, B and C above with your own numbers.
- For a rental, ask the preparer for the cumulative depreciation and calculate the section 1250 and section 1245 pieces separately.
- Put the transfer date and the instrument date in writing and check them against the 1-year and 6-year tests.
- Ask the closing or title agent whether a Form 1099-S will be filed on the later sale and keep the 1041 paperwork with the deed.
Your carryover basis, your filing status and the sale date decide the real bill.
What we could not verify
- Whether a transferee under section 1041 continues the giver’s depreciation schedule or starts a new recovery period: the list in 168(i)(7)(B) does not name section 1041, and we found no IRS publication or regulation on it.
- Whether a post-2018 divorce instrument must fit the new 121(d)(3)(C) list for the 6-year related-to-the-marriage test; the regulation still points to the repealed section 71(b)(2).
- State law: community property, equitable distribution and state income tax on the sale change the numbers and are not covered.
- Gift tax on a transfer that is not incident to the divorce or that does not meet the exceptions in Pub. 504.
FAQ
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Sources, read and saved on October 30, 2026: 26 U.S.C. 1, 71, 121, 168, 469, 1041, 1223, 1245, 1250, 1411 and 7703 (Cornell Legal Information Institute); Treas. Reg. 1.1041-1T and 1.121-4 (Cornell); IRS Publications 504, 523, 527 and 544 (2025 editions); Instructions for Schedule D (2025) and Form 1099-S; Rev. Proc. 2025-32. The worked examples are our arithmetic on assumed amounts; state law, the receiver’s income and the sale date decide the actual result. This is analysis of public documents, not investment, legal or tax advice.
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