Family Home in Divorce Part V
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Family Home in Divorce Part VI

By Warren R. Shiell

The following information is specific to California.

The mortgage interest deduction and divorce

            The home mortgage interest deduction should be taken into account when you consider whether or not you can afford to stay in the house or whether it will be available if you decide to maintain joint ownership of the house after the divorce. You should review IRS publication 936 “Home Mortgage Interest Deductions.”  You can deduct home mortgage interest if all the following conditions are met:

·        you file Form 1040 and itemize deductions on Schedule A (Form 1040)

·        you are legally liable for the loan

·        there is a true debtor-creditor relationship between you and the lender

·        the mortgage is a secured debt on a qualified home in which you have an ownership interest.

If you keep the house in joint names, the spouse who does not live in the house may also be entitled to take a spousal support deduction for payments that are made directly to the bank for mortgage and property tax payments.

            $250,000 residence capital gains tax exclusion

            Under IRS §121, the gain on the sale of a principal residence is excluded up to $250,000 for a single person and $500,000 for a couple filing a joint return. A detailed explanation of IRS §121 is set forth in IRS Publication 523, “Selling Your Home.”  To qualify for the exclusion that taxpayer must have owned and used the residence as a principal residence for a total of at least 2 years in the 5 years immediately ending on the date of sale or exchange.

            If one spouse receives the family home as part of the divorce settlement, that spouse will only be entitled to a $250,000 IRS §121exemption when they sell it.

            If a couple decides to keep the family home in joint names as part of a divorce settlement and to sell it later, both former spouses may be entitled to the $250,000 IRS §121excemption, if one of the spouses continues to live in the home as their primary residence. For example, husband and wife divorce in 2000 and as part of a marital settlement agreement or stipulated Judgment agree to allow wife to say in the home for another five years when the children are 16. If the house is then sold at a gain of $700,000 both husband and wife can exclude $250,000 of their $350,000 gain on the sale.


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