Married couples residing in community property states generally have ownership divided equally between spouses for assets acquired during the marriage. Certain taxpayers may utilize Form 8958, Allocation of Capital Gain (Loss) to Community Property, along with a protective election coded “TW-2” on their tax return to specifically designate how capital gains or losses are allocated between spouses. This can be particularly relevant when separate property becomes commingled with community property, or when one spouse disposes of an asset and the other spouse isn’t aware of the transaction. An example would be a couple residing in Texas where one spouse sells stock acquired before the marriage but held in a joint brokerage account. The election clarifies the separate nature of the gain, potentially mitigating disputes with tax authorities.
Proper allocation using this form and election code can prevent misunderstandings and potential tax liabilities. It provides a clear record of asset ownership, reducing the risk of audits or penalties. Historically, complexities around community property and capital gains have presented challenges for taxpayers and the IRS. Form 8958, particularly with the TW-2 election, offers a standardized method for addressing these complexities, promoting transparency and accurate reporting. This is especially beneficial in cases of divorce or separation, where establishing clear ownership becomes crucial for equitable asset division.
