Final answer:
The IRS defines a property transfer due to a divorce as a tax-free transfer of ownership between spouses as part of their divorce settlement. Both spouses must report the transfer on their tax returns.
Step-by-step explanation:
The IRS defines a property transfer due to a divorce as a transfer of ownership between spouses as part of their divorce settlement. This includes the transfer of real estate, vehicles, investments, and other assets that were jointly owned. The IRS considers these transfers to be tax-free and not subject to capital gains taxes.
For example, if a couple owned a house together and as part of their divorce, one spouse takes ownership of the house while the other receives compensation in other assets, such as a retirement account or cash, the transfer of the house would be considered a property transfer due to a divorce.
It's important to note that each spouse must report the property transfer on their individual tax returns and provide the necessary documentation to support the transfer.