Tax Effects of Equitable Distribution Property Transfers

Equitable distribution statutes in the various states attempt to accommodate the realities of modern marriage and divorce in a fair manner. The tax consequences of equitable distribution property transfers vary from state to state. To determine whether a taxable event occurs upon the property transfer from a title-holding spouse to the non-title-holding spouse depends upon the particular statute at issue. In United States v. Davis (1962), the US Supreme Court held that a divorce-related property transfer was a taxable event for the title-holding spouse/transferor where the non-title-holding spouse/transferee had no ownership interest in the property transferred. Equitable distribution statutes in Kansas, Colorado, New Jersey, and Delaware are discussed. Davis is discussed in regard to the taxability of appreciated property between divorcing spouses. The income tax results of equitable distribution property transfers are analyzed in terms of jurisdictions that find a ''taxable transfer'' and those that find a ''non-taxable transfer.'' A comparison of statutes, as well as policy considerations, leads to the conclusion that an equitable distribution property transfer should be considered a non-taxable division of property between co-owners, rather than a taxable exchange to assure the release of marital rights.