The short answer
Yes, and section 1031 is not what makes it tax-free. Section 1041 says no gain or loss is recognized on a transfer of property between spouses, or to a former spouse incident to a divorce, and the regulations apply it even to an arm's-length sale or an exchange that another nonrecognition rule would otherwise govern. There is no intermediary, no 45-day or 180-day deadline and no like-kind test. The trade-off is basis: each of you takes the other's adjusted basis in what you receive. The rule does not apply if the receiving spouse is a nonresident alien.
At a glance
| Governing rule | Section 1041: no gain or loss on transfers between spouses |
|---|---|
| Covers swaps and sales | Yes, including an exchange another nonrecognition rule would govern |
| Basis | Receiving spouse takes the transferring spouse's adjusted basis |
| Treated as | A gift for income tax purposes, not a sale or exchange |
| Divorce | Within one year after the marriage ends, or related to its end |
| Related to the divorce | Under a divorce or separation instrument and within six years |
| Not covered | A transfer to a nonresident alien spouse |
| Trust transfers | Gain to the extent liabilities exceed basis |
Section 1041 covers any transfer between spouses, a swap included
Section 1041(a) provides that no gain or loss is recognized on a transfer of property from an individual to a spouse, or to a former spouse if the transfer is incident to the divorce. Reg. section 1.1041-1T, answer A-2, says it applies "regardless of whether the transfer is a gift or is a sale or exchange between spouses acting at arm's length (including a transfer in exchange for the relinquishment of property or marital rights or an exchange otherwise governed by another nonrecognition provision of the Code)".
So when spouses trade deeds, section 1041 does the work for both transfers. Neither of you needs to meet the section 1031 tests: the properties need not be like kind, need not be held for investment, and no qualified intermediary or identification notice is involved.
Publication 544 lists the exceptions: a recipient spouse who is a nonresident alien, a transfer in trust to the extent liabilities exceed adjusted basis, and certain stock redemptions.
The price of no tax is the other spouse's basis
Section 1041(b) treats the property as acquired by gift and gives the recipient the transferor's adjusted basis. Answer A-11 of the regulation adds that this carryover basis applies even if the transfer is a bona fide sale and whether the basis is higher or lower than fair market value, for loss as well as gain.
Holding period follows basis. Section 1223(2) includes the period the property was held by the other person when your basis is determined by reference to theirs, so long-term status carries over.
This matters most in a divorce. The spouse who takes the low-basis rental takes the deferred gain with it, so two properties of equal value are not equal after tax.
Divorce transfers qualify within one year, or under the instrument within six
Section 1041(c) treats a transfer as incident to the divorce if it occurs within one year after the marriage ends or is related to the end of the marriage. Answer A-7 says a transfer is related if it is made under a divorce or separation instrument and occurs within six years; later transfers are presumed unrelated unless an impediment such as a legal or valuation dispute delayed them.
Answer A-9 extends the rule to a transfer to a third party on the other spouse's behalf, if the divorce instrument requires it or the other spouse requests or ratifies it in writing. The deemed onward transfer from the other spouse to the third party is not protected, so that spouse can have gain.
A spouse who receives property in the settlement can later run an ordinary exchange as a single owner. The planning sequence is in planning a 1031 around a divorce.
Worked example: a swap between spouses moves the gain, not the tax
Hypothetical, round numbers; run your own numbers with your CPA. You own a rental worth $700,000 with an adjusted basis of $200,000. Your spouse owns a lot worth $700,000 with a basis of $600,000. You trade deeds.
Neither of you recognizes gain. You now own the lot with your spouse's $600,000 basis, and your spouse owns the rental with your $200,000 basis. If your spouse sells the rental the following year for $700,000, your spouse reports $500,000 of gain; if you sell the lot for $700,000, you report $100,000.
Because section 1041 supplies the nonrecognition rather than section 1031, the section 1031(f) two-year rule for related-party exchanges, which is written for exchanges with nonrecognition under section 1031, does not drive this result. On a joint return the shift may not change the household bill; in a divorce it changes who pays.
Where section 1031 still matters for a married couple
If the receiving spouse is a nonresident alien, section 1041 does not apply and the swap is taxable unless section 1031 covers it. A spouse is family under section 267(c)(4), so that swap would also carry the two-year rule for related-party exchanges.
Section 1031 also governs any sale by either spouse to an outside buyer. Questions about who must be on title for those exchanges are in adding a spouse to title on the replacement, and the family list is in who counts as a related party.
If a settlement leaves one spouse with a rental they do not want to manage, that spouse can sell and exchange into a beneficial interest in a Delaware Statutory Trust in their own name.
Related questions
Do we need a qualified intermediary to swap properties between us?
No. Section 1041 makes the transfers non-taxable directly, so the intermediary and the identification and exchange deadlines of section 1031 are not involved.
Do the properties have to be like kind?
No. Section 1041 covers any property, so a spouse can trade a rental for a brokerage account or a residence without recognizing gain.
Is a spouse's purchase of the other spouse's rental for cash taxable?
No. Answer A-2 of Reg. section 1.1041-1T says section 1041 applies even to an arm's-length sale between spouses, and the buyer takes the seller's basis, not the price paid.
Does this work if we are already divorced?
Yes, if the transfer occurs within one year after the marriage ends or is related to the end of the marriage, generally under the divorce instrument and within six years.
Does section 1041 apply if my spouse is not a US resident?
Not if your spouse is a nonresident alien. Section 1041(d) turns the rule off, so gain is recognized unless another nonrecognition rule applies.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.