Tax Free Transfers to Spouse

February 2025

The U.S. Census Bureau published a report on the Number, Timing, and Duration of Marriages and Divorces: 2016.

Marriages are trending later in life. Over the past five decades, there has been an increase of about seven years in the age at first marriage.

In the 1960s, the median age was 20 for women, and 23 for men. In 2008, the median age was 26 for women, and 28 for men. In 2016, the median age rose to 28 for women, and 30 for men.

Among those married in 2016, 77% of women and 76% of men were in their first marriage.

For tax, transfers to a spouse receive favorable treatment.

Special nonrecognition and deduction rules generally result in no income, gift, or estate tax due following the transfer of property to a spouse.

Although gross income generally includes all income from whatever source derived under I.R.C. § 61, an exception exists for transfers of property between spouses.

Property transferred from an individual to his or her spouse is treated as acquired by gift and, thus, excluded from gross income. I.R.C. § 1041(b)(1); I.R.C. § 102(a).

The transferee spouse recognizes no gain or loss on receipt of the property. Treas. Reg. § 1.1041-1T, A-11.

The basis of the transferee spouse in the property is the adjusted basis of the transferor spouse. I.R.C. § 1041(b)(2). The transferee spouse thus receives a carryover basis.

This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than its fair market value at the time of transfer. This rule is different from the rule otherwise applied under I.R.C. § 1015(a) for a gift. Treas. Reg. § 1.1041-1T, A-11.

Although a gift transfer generally includes a transfer to a spouse under I.R.C. § 2511, a marital deduction applies for a gift transfer to a spouse.

If a donor spouse transfers by gift an interest in property to a donee who at the time of the gift is the donor’s spouse, then the donor spouse is allowed a deduction in computing taxable gifts equal to the value. I.R.C. § 2523(a).

A donor spouse may deduct the value of any property interest transferred by gift to a donee spouse, subject, however, to certain limitations. Treas. Reg. § 25.2523(a)-1.

Although the gross estate generally includes all property of a deceased spouse wherever situated under I.R.C. § 2031, a marital deduction also applies for a bequest to a surviving spouse.

The value of the taxable estate is determined by deducting from the value of the gross estate an amount equal to the value of any interest in property that passes from a deceased spouse to the surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate. I.R.C. § 2056(a).

A deduction is thus allowed for the value of any property interest that passes from the deceased spouse to the surviving spouse, subject to certain limitations, particularly with respect to transfers in trust. Treas. Reg. § 20.2056(a)-1(a).

In contrast to transfers made during life, the basis of property in the hands of the surviving spouse is generally equal to the fair market value as of the deceased spouse’s date of death. I.R.C. § 1014(a)(1).

This new basis rule under I.R.C. § 1014 (also known as a “step up of basis”) for transfers made at death is more favorable than the carryover basis rule under I.R.C. § 1041(b)(2) for transfers made during life because built in gain existing at death is eliminated and, therefore, not subject to income tax.

For more information about income tax planning in estate planning, please consider the tax treatise, Income Taxation of Property Acquired from a Decedent.