Can Capital Gains Be Split Between Spouses?

Capital gains taxes can be a major factor when selling investments or property. For married couples, knowing whether these gains can be split between spouses is crucial for tax planning. The ability to divide capital gains depends on ownership structure, state laws, and how the asset was acquired.

Tax treatment varies depending on how an asset is held. Different rules apply based on whether a couple lives in a community property or common law state, files jointly or separately, or receives assets through inheritance or gifts. Understanding these distinctions ensures accurate reporting and may provide tax-saving opportunities.

Ownership Structures

How an asset is owned determines how capital gains are taxed when it is sold. Assets can be held individually, jointly, or through legal entities, each with different tax implications.

Joint ownership is common among married couples, with two primary forms: joint tenancy with right of survivorship (JTWROS) and tenancy by the entirety. In JTWROS, both spouses have equal ownership, and when one passes away, the other automatically inherits the full asset. This simplifies estate transfers but does not allow for flexible capital gains allocation. Tenancy by the entirety, available in some states, offers similar benefits with added creditor protection.

Holding assets individually means capital gains are solely attributed to the owner. If one spouse owns an investment account in their name alone, any gains from selling stocks or real estate are reported entirely on their tax return. Some couples transfer ownership before selling to balance tax liabilities, but such transfers must be structured carefully to avoid unintended tax consequences.

Legal entities, such as trusts or family partnerships, offer another way to manage ownership. A revocable living trust allows spouses to retain control while simplifying estate planning. Family limited partnerships (FLPs) or limited liability companies (LLCs) can provide tax advantages, particularly for high-net-worth individuals looking to distribute gains among family members. These structures require careful planning to comply with IRS regulations and avoid scrutiny over improper income shifting.

Community Property vs. Separate Property

The classification of assets in a marriage affects how capital gains are taxed. In community property states, assets acquired during the marriage are generally considered jointly owned, regardless of whose name is on the title. This means both spouses have equal ownership, and any gains from selling these assets are typically split equally for tax purposes. This can be beneficial when one spouse has a lower income, as it allows capital gains to be distributed evenly, potentially reducing the overall tax burden.

Separate property consists of assets owned by one spouse before marriage, as well as inheritances and gifts received individually. These assets remain under the sole ownership of that spouse unless commingled with marital assets. If separate property is sold, the entire capital gain is attributed to the individual owner, which may result in a higher tax liability if that spouse falls into a higher tax bracket. Proper documentation is necessary to maintain the separate classification of these assets, as failure to do so can lead to disputes with tax authorities.

Community property laws also provide a tax benefit when one spouse passes away. Under Internal Revenue Code 1014(b)(6), assets held as community property receive a full step-up in basis upon the death of one spouse. This means the cost basis of the asset is adjusted to its fair market value at the time of death, eliminating unrealized capital gains. In contrast, common law states only allow a step-up in basis for the deceased spouse’s portion of a jointly owned asset, leaving the surviving spouse with potential taxable gains if they later sell the property. This difference can result in substantial tax savings for couples in community property states.

Allocation of Gains in Different Filing Statuses

A married couple’s tax filing status affects how capital gains are reported and taxed. For those filing jointly, all income, deductions, and capital gains are combined on a single return. This often results in lower tax liability due to broader tax brackets. In 2024, the 15% long-term capital gains rate applies to joint filers with taxable income between $94,051 and $583,750, whereas for separate filers, the same rate applies only up to $291,850. Filing separately could push one spouse into a higher tax bracket faster, leading to more taxes owed on capital gains.

For couples filing separately, each spouse reports gains from assets they individually own. If both names are on the title, the IRS typically assumes a 50/50 split unless documentation proves a different ownership percentage. This can be beneficial when one spouse has significant medical expenses or deductions based on adjusted gross income (AGI), as a lower AGI could allow them to qualify for additional tax benefits. However, filing separately also comes with drawbacks, such as losing eligibility for certain tax credits, including the Earned Income Tax Credit and education-related deductions.

The marriage penalty can also influence how gains are allocated. While joint filers often benefit from lower tax rates, combining incomes can sometimes push a couple into a higher bracket than if they filed separately. This is particularly relevant for the Net Investment Income Tax (NIIT), which imposes a 3.8% surtax on investment income when modified adjusted gross income (MAGI) exceeds $250,000 for joint filers but only $125,000 for those filing separately. If one spouse has substantial capital gains and the other has little to no investment income, filing separately might help avoid or reduce this additional tax.

Inherited or Gifted Assets

Assets received through inheritance or as a gift have unique tax treatment that affects how capital gains are allocated between spouses. Inherited assets generally receive a step-up in basis to their fair market value as of the decedent’s date of death, minimizing taxable gains when sold. Gifts, however, retain the original cost basis of the giver, potentially leading to significant capital gains if the asset has appreciated over time.

When a spouse inherits an asset individually, the gain upon disposition belongs solely to them for tax purposes. If the asset is later transferred to a jointly held account or re-titled in both spouses’ names, the ability to split gains depends on whether the transaction is considered a bona fide gift under IRS guidelines. Transfers between spouses are generally tax-free under Internal Revenue Code 1041, but future gains will be allocated based on ownership structure post-transfer. If the asset remains solely in the inheriting spouse’s name, any capital gains are reported exclusively on their return, even if the couple files jointly.

Reporting Requirements

Properly reporting capital gains ensures compliance with tax laws and avoids potential penalties. The IRS requires capital gains to be documented on Schedule D (Form 1040) and, in most cases, on Form 8949, which provides a detailed breakdown of transactions, including purchase and sale dates, cost basis, and proceeds.

For jointly owned assets, the IRS typically assumes an equal split unless documentation supports a different allocation. If a couple files separately, each spouse must report their respective share of the gain based on ownership percentage. In community property states, gains are divided equally unless the asset qualifies as separate property. When an asset is inherited, the stepped-up basis must be accurately recorded to determine the correct taxable gain. Errors in reporting, such as miscalculating basis or failing to account for prior depreciation deductions, can trigger IRS scrutiny and potential tax liabilities.

Gifted assets require additional reporting considerations. The recipient assumes the donor’s original cost basis, which must be accurately documented to determine capital gains upon sale. If the asset was gifted while the donor was alive and exceeded the annual exclusion amount ($18,000 per recipient in 2024), the donor may need to file a gift tax return (Form 709), though this does not necessarily result in immediate tax liability. Failure to properly track and report the basis of gifted assets can lead to unexpected tax consequences when the asset is eventually sold.

Role of Documentation

Maintaining thorough records is necessary for accurately reporting capital gains and substantiating tax positions in the event of an audit. Documentation should include purchase and sale records, cost basis calculations, ownership agreements, and legal documents establishing how the asset is held. Without proper records, the IRS may default to assumptions that could result in a higher tax liability.

For jointly owned assets, keeping clear records of each spouse’s contribution to the purchase can help justify an unequal allocation of gains if needed. In community property states, documentation proving an asset was acquired before marriage or through inheritance can prevent it from being classified as community property. When assets are transferred between spouses or placed into trusts, maintaining records ensures that gains are reported correctly and that any applicable tax benefits, such as step-ups in basis or exclusions, are preserved.