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Dividing Property In Divorce Tax Traps – Part 4 In Series



Dividing Property In Divorce Tax Traps – Part 4 In Series

(Part 4 is continuation of series, links to all parts are provided at end of this blog post. This valuable series on Dividing Property In A Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.)  

Dividing Property In Divorce Tax Traps – Part 4

  1. Mortgage Interest and Real Estate Taxes. An issue that practitioners frequently face in divorce situations is allocating the deduction between spouses for mortgage interest and taxes when one spouse has moved out of the residence and separate returns are being filed.
    • If spouses are still legally married at year’s end and a joint return is filed, there is no need to allocate deduction, even if spouses are living apart
    • If separate returns are filed and mortgage interest and/or real estate taxes paid from a joint account, half of the payment is allocated to each spouse.[1]
    • Interest and real estate taxes paid from separate accounts are deemed to be paid by the spouse who owns the account.[2]
    • In community property states, expenses paid from community property funds are generally allocated one half to each spouse.[3] Community property rules vary from state to state. Practitioners may need to consult legal counsel as to community property rules in their state. For example, in California, the marital community for tax purposes ends when the spouses separate with the intention not to reunite.[4] In other states, the community does not end until the date of divorce. In community property states, expenses paid from noncommunity funds are allocated to the spouse who paid them.
    • Interest payments must be “qualified” in order to be deducted. Often in a divorce situation, one of the spouses will move out of the house and establish a second residence, while continuing to contribute to the mortgage payments.

The question then arises as to if non-resident spouses can deduct their share of the mortgage interest, since they are no longer using the house as their principle residence.

  • Payments while separated but divorce is not yet final. When spouses move out during the pre-divorce period, they are no longer using the home as their principle residence. However, qualified residence interest also may include interest paid on a second home.[5] A second home may be defined as a vacation property, boat, or recreational vehicle, assuming it otherwise qualifies. For purposes of deducting the interest on a second home, a taxpayers’ use of the property as a residence is deemed to include the personal use by any member of the taxpayer’s family.[6] Accordingly, even though separated, spouses that are not using the home as their principle residence or second home, may still be able to deduct some or all of the mortgage interest so long as the other spouse is using the home. However, if the couple is no longer married, they are no longer considered to be members of the same family for tax purposes, thus the aforementioned family attribution rules would not apply. However, if there are children that continue to use the house, their use can be attributed to a nonresident former spouse, thus qualifying it as a second residence, therefore allowing them to deduct some or all of the qualifying mortgage interest deduction.

Example: Rob Sr. and Mary are divorced. Mary and their son Rob Jr. continue to live in the former marital residence while Rob Sr. lives across town in an apartment. Rob Sr. pays the mortgage payment on the home.

Since Rob Sr. no longer uses the home as his principal residence, he cannot deduct the mortgage interest attributed to the payments under the principal residence mortgage interest rules. However, since Rob Jr. lives in the home, Rob Sr. can deduct the mortgage interest (assuming it otherwise qualifies) under the rules that allow mortgage interest for a second home to be deductible by a nonresident spouse when a direct family member continues to live in the residence.

  • Post marriage payments for home mortgage interest. If the former marital home is not sold during the divorce proceedings, what generally happens is that one spouse will continue to use the home as his/her principal residence and the other former spouse will make other living arrangements. Often, the former spouse not living in the former marital residence will continue to pay some or all of the expenses for keeping up the home, including the mortgage.
  1. Payments may qualify as alimony. When one ex-spouse owns and lives in the former marital home, and the other ex-spouse is required under the terms of a pre-2019 divorce or written separation agreement to pay the cost of maintaining the house, such payments may be considered alimony and therefore be deductible by the payer and taxable to the recipient. The payments would have to meet all the requirements for deductible alimony.[7]

Go To Part 1 In Series

Go To Part 2 In Series

Go To Part 3 In Series

Have a question? Contact David Ellis, Ellis & Ellis CPAs.

All Tax Practitioners And Taxpayers Welcome To Contact David

(All footnotes will be posted at end of series! This material is for informational purposes only and is not a substitute for tax advice from a qualified professional and the author assumes no liability whatsoever in connection with its use.  No advisor/client relationship exists.)

David Ellis is the managing partner of Ellis & Ellis, CPAs, Inc. located in Pasadena, California. He has over 25 years of experience in the practice of Divorce, Trust/Estate, and other family tax matters. He is an advisor in matters pertaining to Trust, Estate, and Corporate Taxation to the Los Angeles County Office of the Public Guardian. The firm also provides other general tax services and IRS representation. He earned his Bachelor’s Degree from the University of Southern California in Communication Arts and Sciences. He is a frequent writer and speaker on various tax subjects, and has provided continuing education services to other CPAs and tax professional in the area of Divorce, Trust, and Estate Taxation. An article that he recently co-authored entitled The Tax Consequences of Dividing Marital Property can be found in the December 2014 issue of Practical Tax Strategies, a national professional tax publication.

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