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Tax Exempt Transfers of Real Estate in a Divorce

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A transfer of real estate from one spouse to another, in a jointly held property, is exempt from real estate transfer tax when it is done pursuant to a divorce decree or marital settlement agreement.  That is why it is essential that a marital settlement agreement properly address and provide for the disposition of all marital assets.

By Attorney Jeffrey B. Engle, Divorce Attorney, Harrisburg, PA

In a recent pronouncement, the PA Department of Revenue clarified the tax exempt nature of a jointly held piece of real estate between two divorcing parties.  In 2011 PA REG TEXT 276196, enacted November 19, 2011 and codified at 61 PA Code 91.193, certain real estate transactions are excluded or exempt from real estate transfer tax of 2% of the contract amount or the stated amount.

In paragraph 6 of the Rule, the Department of Revenue Regs provide as follows:

(6) Transfers between certain family members:

(i) A transfer between any of the following:

(F) Persons who were previously married but who have since been divorced, if the transferred *[ realty ] real estate* was acquired by both spouses or by either spouse before or during their marriage.

*This exemption only applies if the transfer is under the final divorce decree or a court ordered division or distribution of the real estate incident to the divorce.

  • Example 1. During the marriage, husband and wife purchased a parcel of real estate and took title as tenants by the entireties. Five years later, the spouses file for divorce. The spouses receive a divorce decree, but the spouses do not request a division of their marital assets as part of the divorce. Upon the divorce becoming final, the spouses are no longer married; by law, they become equal tenants in common in the real estate. Two years later, ex-husband agrees to convey his tenant in common interest in the real estate to ex-wife. The conveyance of ex-husband's interest is subject to tax because the ex-spouses are no longer married and the conveyance was made after and not in connection with the divorce.
  • Example 2. Same facts as Example 1, except that as part of the divorce decree the Orphans' Court accepts a property settlement agreement executed by the spouses. The agreement provides that husband will convey his interest in the real estate to wife within 3 years of the divorce decree. In this case, ex-husband's conveyance of the real estate to ex-wife two years after the divorce is not subject to tax because it was executed as part of the property settlement that was approved as part of the divorce decree.
  • Example 3. Same facts as Examples 1 and 2, except that the property settlement is bifurcated from the divorce proceeding, and the property settlement agreement is approved by order of the court after the divorce decree is entered. Further, the agreement provides that ex-husband will convey his interest in the real estate to ex-wife who is to use the real estate as a primary residence for herself and the ex-spouses' children. The property settlement agreement also provides that ex-wife will convey the entire interest in the real estate to ex-husband at the earlier of their living children reaching 25 years of age or wife and children ceasing to use the real estate as their primary residence. When ex-husband conveys his interest in the real estate to ex-wife, the conveyance is exempt from tax. Also, when ex-wife conveys the real estate to ex-husband after all the children reach 25 years of age or ex-wife and the children no longer use the real estate as their personal residence, the deed of conveyance will also be exempt from tax. Both conveyances are deeds executed as the final severance of the marital unit pursuant to the divorce as approved by the Court.

It is essential that a qualified divorce attorney conduct a thorough review of all assets acquired jointly or during the course of the marriage.  (See link to my article on Divorce 101 as to what assets should be considered).  A plan must be put in place to exempt certain transfers of real estate from taxes at a later point, should a transfer occur.  You may contact Shaffer & Engle Law Offices, LLC toll free or email us today

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