Acquiring Stock from Your Spouse

A surprising tax rule applies when you receive stock from your spouse. We’ve found that many financial planners and divorce lawyers, and even some tax professionals, are unaware of this rule.

One rule to ring them all

The rule described here does not apply to stock you inherit from your spouse. However, it applies when you receive stock in any of the following ways:

• You receive a gift from your spouse.
• You buy stock from your spouse.
• You receive stock as part of a settlement in a divorce or separation.

In any of these situations, the rule is very simple, and it is hard and fast: your basis is the same as the basis your spouse had immediately before you acquired the stock. Although this rule is simple, it is worth taking a moment to think about what it means.

Gifts

For most gifts, there is a tricky little rule that means you can have dual basis for stock you received as a gift. (For an explanation, see Stock Received as a Gift.) This rule doesn’t apply to gifts between spouses. You simply take the same basis your spouse had.

Purchases

Here is the really strange part of this rule. (In fact, even some tax professionals have a hard time believing it.) If you buy stock from your spouse, you get the same basis your spouse had — no matter what you paid for the stock!

Example: Your spouse bought 200 shares of XYZ for $80 (total of $16,000). Later, when XYZ is at $125, you buy the stock from your spouse for $25,000. Your basis is only $16,000! If you sell it the next day for $25,000, you will have to report a “gain” of $9,000.

This may seem unfair, but there’s another side to the coin. Your spouse did not have to report any gain when you bought the stock. There is no reporting of gain on sales of stock (or anything else) between spouses, and therefore no change in basis.

Divorce and separation

The same rule applies to divorce and separation. Let’s suppose you’re splitting up, and the assets you’re dividing include 100 shares each of two different stocks. One has been Wall Street’s darling, rising from $20 to $60; the other has been a dog, falling from $90 to $55. At a tender moment during the divorce proceedings, your spouse says you can take either stock, and he or she will keep the other one. You can’t believe what a dope your spouse is as you grab for Darling, Inc.

But when you sell your Darling stock for $60, you have only $20 of basis and have to report a gain of $40. By the time you’re finished with taxes, you get to keep maybe $50 per share. Meanwhile your dopey spouse is selling Dog Corp. for $55 and paying no taxes at all. In fact, your spouse reports a loss that results in lower taxes on other income. The end result is that your spouse pockets maybe $63 per share. All’s fair in love and war.