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Mortgage Interest Tax Deduction
Divorce is an extremely stressful and emotional process because it raises issues that involve almost every aspect of both parties’ lives such as: whether to sell the marital home, who will keep the home if it is not sold, how will child custody be shared, who will take the pets, who will be responsible for debts incurred during the marriage and how shared bank accounts, investment and other marital property will be divided upon divorce. Because of the plethora of issues that both parties decide, tax concerns and the tax implication of divorce often receive very little attention from the parties, if at all.
However, failure to consider the interplay between tax and divorce is an error that may lead to problems with the IRS or result in extensive post-divorce litigation between the parties to resolve disputes regarding important tax and financial concerns that were overlooked during the divorce. One tax issue that has the potential to cause contention between former spouses post-divorce is the issue of who will claim the home mortgage deduction for the tax year in which the couple was divorced.
The answer to this question is simple if the home is owned exclusively in the name of one former spouse. In this case, only that spouse may claim the deduction post-divorce. The resolution to this issue becomes more complex when the home is owned jointly. If the home is owned jointly and the mortgage is paid from a joint account, the deduction for mortgage interest can be split equally between the former spouses for the period during which the couple was still married. The issue of how the home mortgage deduction for mortgage payments made during the post-divorce portion of the tax year is controlled by the terms of the Final Divorce Decree or Marital Settlement Agreement and the form of ownership following the divorce. If both parties continue to own the home jointly post-divorce, both former spouses will be entitled to take deductions for half of the mortgage interest paid. However, if ownership of the marital residence is transferred to one party solely in the divorce, only that party may claim the mortgage interest deduction for post-divorce portion of the tax year (the time between the date of divorce and December 31).
In many cases, the issue of which spouse may claim the mortgage interest deduction is one that must only be confronted once. However, if the former spouses continue to jointly own the property post-divorce, such as in situations where the Divorce Decree requires Husband to pay the mortgage on a home that remains jointly owned, but where the Wife resides exclusively, part of those mortgage payments may be considered alimony for the purposes of claiming the mortgage interest deduction. The former spouse who pays the mortgage interest may deduct half the amount as alimony and the other half as an itemized deduction for home mortgage interest. The former spouse who actually resides in the home may also be able to claim an itemized deduction for half the mortgage interest and real estate taxes, but he or she must declare half the amount paid by the other former spouse as income from alimony.
As there are several other arrangements concerning the ownership and occupation of the marital home post-divorce that couples may agree to in their Marital Settlement Agreements, the issue of who may claim the mortgage interest deduction post-divorce may become even more complex. In the case of unique ownership or occupation situations, as well in matters that appear relatively simple facially, it is advisable for both parties and their respective attorneys to consult applicable state and federal tax law in addition to IRS Publication 504, Divorced and Separated Individuals, in determining how the mortgage interest deduction should be handled post-divorce.