As part of a divorce settlement in Year 1, Spouse A transfers stock (Basis $10,000, FMV $50,000) to Spouse B. What is the tax consequence of this transfer?

Answer options:

Spouse A recognizes $40,000 gain.

Spouse B has a basis of $50,000.

Spouse A recognizes gain, but Spouse B gets a step-up in basis.

No gain recognized; Spouse B takes a basis of $10,000.

How to approach this question

Apply IRC §1041. Transfers incident to divorce are treated as gifts: No gain/loss recognized, and carryover basis applies.

Full Answer

D.No gain recognized; Spouse B takes a basis of $10,000.✓ Correct

IRC §1041. No gain or loss is recognized on a transfer of property from an individual to a spouse (or former spouse if incident to divorce). The transferee takes the transferor's adjusted basis ($10,000).

Common mistakes

Assuming the transfer is a sale at FMV.

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