(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
- 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.
- Interest and real estate taxes paid from separate accounts are deemed to be paid by the spouse who owns the account.
- In community property states, expenses paid from community property funds are generally allocated one half to each spouse. 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. 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.