Giving up Home Equity in Divorce

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If he is liable for the debt payments on the house and maintains an ownership interest and the house is not rented and he treats the house as a second home (he does not have to live there) and the home secures the debt, he would be entitled to deduct all the mortgage interest he pays. Ditto for the property taxes he pays. You can deduct qualified mortgage interest on your main home and a second home. He doesn't have to be a majority owner.

Generally, he would be better off giving up the home, taking "equivalent" assets for what he gave up, and taking a deduction for alimony if so ordered by the divorce or separation agreement.

There are some other issues that must also be addressed when one party in a divorce keeps the main home and surrenders other assets: Liquidity of assets retained by each party, and capital gain taxes on the assets being divided. This is where the real fight takes place as determining what's an equivalent asset is not black and white. It can get even more complex if there are retirement accounts that each spouse may have an interest in.

The husband in this case is focusing on the wrong issue.

To emphasize Alan's point, to deduct mortgage interest the loan must be secured by the taxpayer's primary residence or one other personal residence. If the home were his primary or second residence then _any ownership interest_ at all would allow him to deduct the interest he pays.

See table 5 in publication 504. He might have to deduct half of the mortgage interest on Schedule A, and half as alimony on form 1040 itself. The other spouse would report alimony received as income.

Can you give some specific example where the husband would be better off taking equivalent assets and taking a deduction for alimony?

nish

There are a few unexplained issues here. All there minor children involved? That is a very big issue because the general rule is that property settlements can noy be revisited, but child support can be revisited.

Noting that I am not an attorney, my advice to everyone is to get a

Example: Appraisal: $500,000 Current Mortgage: $300,000 Equity: $200,000

Age of Youngest Child: 7

He takes a second mortage for $100,000 @ 5% compounded annually. The term of the mortgage is 11 years, i.e., 18 - 7 = 11.

The only tax consequence is that he has to declare the annual interest on his tax return. He gets his equity plus interest at closing. If he opts for a balloon mortgage, I would set the term to be when the youngest child reachs age 22.

It is very important the there is a due on sale/due on rental clause. This is not a DIY project. You need the most competent real estate attorney you can find.

Dick

Not being an attorney seems to be an advantage in your case.

I can't tell you how many divorces I've seen where one spouse ends up agreeing to buy out the other's interest in their home, and gives a note for the money owed. A note but no mortgage to secure the debt. While not routinely it happens much too often that the debtor spouse (the one who got the house) then files bankruptcy and wipes out the debt to the other spouse, but gets to keep the home.

This kind of thing can be prevented by including a mortgage secuing the debt. But too many attorneys don't know the limits of their expertise, just don't know what they're doing, or don't care.

It is always to my advantage because almost all of my legal advice ends with a disclaimer to the effect that you need to discuss this with a competent attorney. However, I usually omit that finding one is your problem.

Merci beaucoup, mon ami. As a wise man once told me "An unsecured debt over more than $10 is usually uncollectible." And as many of us know from "The School of Hard Knocks", you get treated better before marriage than afterwards, and you get treated like garbage after divorce. Unfortunately my comments are gender independent.

Dick