How to Split Home Mortgage Interest in Divorce
Tax issues are generally not the paramount concern of couples going through divorce. However, failure to recognize and understand the impact divorce may have on Federal Income Tax filings may lead to unsavory results and unnecessary conflict with the IRS.
One question that many divorcing or divorce couples often fail to address until the time for filing taxes is fast approaching is: “Who gets to take the mortgage interest deduction?” Like many questions regarding divorce, the answer to this question depends on the circumstances of each individual case. Thus, it is important for any individual who has recently finalized their divorce to seek the advice of a tax expert regarding the effect their divorce may have on their taxes. In fact, it is advisable to seek both the input of an experienced divorce attorney as well as a tax expert during the divorce process, to ensure that any Marital Settlement Agreement entered into adequately address how tax matters will be handled during and after the divorce process. Below is some general guidance on how the mortgage interest deduction is handled post-divorce.
- If the home is owned in the name of only one of the former spouses during the marriage, only that spouse may claim the mortgage interest deduction for the payments made during the marriage post-divorce.
- If the home is jointly owned and the mortgage was paid from a joint account during the marriage, the mortgage interest deduction may be split equally between the former spouses for the pre-divorce portion of the year.
- The mortgage interest deduction and deduction for real estate taxes paid for the post-divorce period of the year will be determined by the terms of the final Order of Divorce or Marital Settlement Agreement and the form of ownership following the divorce. Thus, if the home continues to be owned jointly by both former spouses, both former spouses are both entitled to take deductions for half of the mortgage interest and real estate taxes. Conversely, if a marital home is transferred to one party solely as part of a settlement, only that ex-spouse may take the mortgage interest deduction.
- If a Marital Settlement Agreement requires one former spouse to pay the mortgage on a home owned jointly by the former spouses, those payments may be considered alimony and deducted as such.
Lenders issue a Form 1098 Mortgage Interest Statement to the borrower and send a copy to the Internal Revenue Service. When multiple borrowers are on the loan, the lender generally names one of the borrowers as the principal borrower. The principal borrower receives the Form 1098 in the mail. Although co-owners do not receive the statement, they are legally entitled to deduct the actual interest paid on the loan. Borrowers are responsible for determining a fair division.
A divorced couple who shared a mortgage obligation during the tax year that they are divorced are entitled to divide the mortgage interest paid between their returns if the home is community property. The division does not necessarily have to be equal, but it must be fair and accurate. Only individuals who itemize deductions can deduct mortgage interest.
- Determine your filing status. Your filing status depends on when your divorce was finalized. Anyone who is not married as of December 31 of the tax year must file a single return. If you were married for the entire tax year, you can choose to file a married joint or married single return.
- Gather your Form 1098 indicating the interest amount paid during the year Even if you are both listed as owners, the lender may only issue one 1098 to the name appearing first on the mortgage. You are entitled to claim your share of the deduction, even if the 1098 is not assigned to you.
- Report your portion of interest paid on Schedule A of Form 1040.
- Attach a statement to your return if your spouse was the one who received the Form 1098. In your statement, include how much interest you paid and give your spouse’s name and address.
If the house is owned jointly after a divorce, and both former spouses are still paying the mortgage interest, then the deduction can still be split equally. If the house is in the name of only one ex-spouse, then only that individual has the right to claim the deduction.
Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.
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