31 C.F.R. 1031.320(b)(2)(iii)
Exemption: Divorce or Dissolution Transfers
Property transfers that happen as part of a divorce or dissolution of marriage are exempt when they are directly tied to the legal proceedings.
Rule text summary
The rule exempts transfers of residential real property that are incident to divorce, legal separation, or dissolution of marriage or civil union, when the transfer is part of the legal division of marital or partnership property.
Paraphrased for clarity. See the Federal Register Final Rule for authoritative text.
Analysis
Like the death exemption, this one recognizes that property transfers driven by life events, specifically the end of a marriage, are fundamentally different from purchase transactions that could be used for money laundering. When a court orders one spouse to transfer property to the other as part of a divorce settlement, that is not a cash purchase through a shell company.
The exemption requires that the transfer be "incident to" the divorce or dissolution, meaning it must be part of the legal process of dividing property. A transfer ordered by the divorce decree, included in a marital settlement agreement, or directed by a court as part of the dissolution proceeding qualifies. A separate, independent sale between ex-spouses years after their divorce that happens to involve the same property likely does not.
Practical guidance
- Obtain a copy of the divorce decree, marital settlement agreement, or court order that directs the property transfer. This is your primary supporting document.
- Verify that the specific property being transferred is identified in the legal documents as part of the property division.
- Record the exemption citation and the specific documents supporting your determination in the file.
- If the transfer involves consideration beyond what the decree specifies (one ex-spouse paying the other an amount not reflected in the settlement), analyze whether the additional terms take it outside the exemption.
Common mistakes
- Assuming that any transfer between people who are divorced is automatically exempt. The transfer must be incident to the divorce proceedings, not just between people who happen to be formerly married.
- Accepting a verbal representation that 'this is a divorce transfer' without collecting the decree or settlement agreement. The exemption requires documentary support.
- Failing to analyze side terms. If the divorce decree says 'wife gets the house' but the actual transaction involves the wife's LLC purchasing the husband's interest for $400,000 cash, the LLC purchase may not be covered by this exemption.