Transferring a Home to a Nonresident Alien Spouse
Author: Brad Howland
First Posted: June 12, 2014
U.S. citizens living abroad, who jointly own a home with a nonresident alien spouse, might seek to avoid paying tax to the United States when the home is sold or eventually disposed of (if their interest in the home shows a gain of more than $250,000), by transferring their portion of the home to their spouse in advance. The IRS made a subtle change to the 2012 version of Publication 523, which implies they might frown upon a tax free transfer.
Prior to 2012, Publication 523 (pdf) stated:
Transfer to spouse. If you transfer your home to your spouse or to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). This is true even if you receive cash or other consideration for the home. As a result, the rules explained in this publication do not apply.
If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.
Exception. These transfer rules do not apply if your spouse or former spouse is a nonresident alien. In that case, you generally will have a gain or loss.
The above implied that the exception for nonresident alien spouses only applied if the transfer was due to divorce.
The 2012 version of Publication 523 (pdf), published in early 2013, was changed to:
Transfer to spouse. If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). This is true even if you receive cash or other consideration for the home. As a result, the rules explained in this publication do not apply.
If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.
Exception. These transfer rules do not apply if your spouse or former spouse is a nonresident alien. In that case, you generally will have a gain or loss.
The implication is totally different with the addition of a few words. It now seems the exception for nonresident alien spouses applies to all transfers.
However, notice that the IRS softens the exception with the word "generally." Some writers have argued that the Internal Revenue Code does support the tax free transfer of a home by gift to a nonresident alien spouse.
The applicable sections appear to be:
- 26 U.S. Code 1041 — Transfers of property between spouses or incident to divorce
- 26 CFR 1.1041-1T — Temporary Q&A (Note that A-3 states "assuming no other nonrecognition provision applies")
- 26 U.S. Code 1015 — Basis of property acquired by gifts and transfers in trust
I don't know the answer, but it seems to me that the IRS has taken a fairly strong position against a tax free transfer. After all, why would they want to let all that amassed wealth evaporate away from the United States, with no chance of ever collecting tax on it?
A gift tax return needs to be filed to report a home transfer if the amount transferred is over the annual exclusion amount for gifts to nonresident alien spouses (currently $143,000 for 2013). A gift return reports adjusted basis and current fair market value, so it should be immediately obvious to the IRS that a transfer is taking place and a gain hasn't been reported on the donor's 1040 tax return.