After 5 years of marriage, Dave and Janet decided to get a divorce. As part of the divorce settlement, Janet transfers to Dave the house she purchased prior to their marriage. Janet's adjusted basis for the house is $230,000 and the fair market value is $410,000 on the date of the transfer. What are the tax consequences to Janet and to Dave as a result of the transfer?
Janet has a realized gain of $180,000 ($410,000 – $230,000). However, no gain is recognized as § 1041 provides that transfers of property between former spouses incident to divorce are nontaxable transactions.
Dave's basis in the house is a carryover basis of $230,000 (i.e., the same as Janet's adjusted basis).
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