After consulting a divorcing couple following passage of the 2018 Tax Reform Bill, we realized that the 2018 Reform Tax Bill will have major implications on their financial situation. “Going forward alimony/Maintenance is no longer tax deductible.”
This specific change may even have a greater effect on divorcing spouses where real estate and mortgage financing are involved. Unfortunately, the changes where mortgage financing is involved may not have a positive effect.
Now it is even more important than ever to consult a competent family law attorney and a Certified Divorce Lending Professional (CDLP) when considering divorce and the financial implications.
The Top Two Changes Are:
- Potential loss of mortgage interest deduction in divorce situations
- Difficulty in qualifying for a mortgage for paying spouses
The extent of the effects of the 2018 Tax Reform Bill is not yet completely understood for the mortgage industry now. Mortgage underwriting guidelines will soon be modified to consider the effects of the loss of the alimony tax deduction.
Let’s take a deeper look at the top two changes and how they will affect you during a divorce.
The 2018 Tax Reform Bill has reduced the maximum loan amount on acquisition debt from $1,000,000 to $750,000. This means that mortgage interest on loan amounts up to $750,000 used to purchase or significantly improve the home is tax deductible under the acquisitions debt category. Mortgage interest on loan amounts above the $750,000 limit will no longer be tax deductible. The 2018 Reform Bill has also eliminated the tax deductibility of Home Equity Lines of Credit (HELOCS).
The bigger issue for divorcing clients is when one spouse is ordered to pay the current mortgage on the marital home and is in return allowed to deduct the mortgage interest paid from his/her personal income taxes. Depending upon how ownership and title is held on the marital home may now cause a significant tax concern for the paying spouse.
Previously for divorcing homeowners who jointly owned the marital home, the spouse claiming the mortgage interest deduction could deduct one-half of the mortgage interest paid as the mortgage interest deduction and the other one-half as alimony/maintenance paid. (IRS Publication 504)
Use the table below to find how much of your payment is alimony and how much you can claim as an itemized deduction.
|IF you must pay all of the…||AND your home is …||THEN you can deduct and your spouse(or former spouse) must include as alimony…||AND you can claim as an itemized deduction …|
|mortgage payments (principal and interest)||jointly owned||hall ot the total payments||half of the interest as interest expense (if the home is a qualified home).1|
|real estate taxes and home insurance||held as tenants in common||hall of the total payments||half of the real estate taxes2 and none of the home insurance.|
|held as tenants by the entirety or in joint tenancy||none of the payments||all of the real estate taxes and none of the home insurance.|
- Your spouse (or former spouse) can deduct the other half of the interest if the home is a qualified home.
- Your spouse (or former spouse) can deduct the other half of the real estate taxes.
If alimony/maintenance paid is no longer allowed as a tax deduction for the paying spouse, what is to happen to the other half of the mortgage interest deduction? It will be very important to work closely with a tax advisor who specializes in working with divorce clients to help mitigate any negative tax consequences about the mortgage interest deduction.
Caution should also be exercised when changing how ownership/title is held. Please let me know if I can provide additional information to you on the various methods for holding ownership/title on real estate and the effects that divorce may play on this topic.
Mortgage guidelines frequently change and changes can certainly be expected with regards to the loss of the tax deduction of alimony/maintenance paid. Divorce mortgage lending is quite different than working with your typical borrower as there are many underwriting guidelines specific to divorce situations. The primary effect of the alimony deduction change may certainly have a negative impact on the paying spouse’s ability to qualify for mortgage financing in the future.
Currently mortgage guidelines allow for alimony/maintenance paid to be calculated as a reduction to income rather than categorized as a liability on the mortgage loan application – because it is a tax-deductible expense. This provides a tremendous positive effect on the debt-to-income ratios for the paying spouse when qualifying for a new mortgage. Once the alimony payment is no longer tax deductible, the payment will need to be listed as a liability and may result in many unqualified mortgage applications.
An ex-husband who is paying his former wife 50% of his gross income as maintenance is already at a 505% debt-to-income ratio without adding on his new mortgage payment or any other liabilities he may have. Having the ability to reduce his gross income first by the maintenance paid would have a completely different outlook.
Sam has a monthly gross income of $10,000, he pays $5,000 in monthly maintenance and has no other consumer debt.
Current Method Alimony as a Tax-Deductible Liability:
Sam has an effective gross income of $5,000 and may qualify for a mortgage payment up to $2,500. (50% debt-to-income ratio)
Effect of Removing Alimony as a Tax-Deductible Liability:
Sam has a monthly gross income of $10,000 and pays $5,000 per month as a maintenance liability. Sam is at a 50% debt-to-income ratio and qualifies for a mortgage payment of ZERO!
It is my responsibility as a Certified Divorce Lending Professional (CDLP) to stay up to date and educated on changes that will affect my divorcing clients from all financial aspects. Now more than ever, divorcing clients will need to work with a knowledgeable divorce mortgage professional.
Vice President/Certified Divorce Lending Professional
NMLS ID #779932
Corporate NMLS ID #12007
Why you Need a Certified Divorce Lending Professional (CDLP) on Your Professional Divorce Team.
A professional divorce team has a range of team players including the attorney, financial planner, accountant, appraiser, mediator and yes, a divorce lending professional. Every team member has a significant role ensuring the divorcing client is set to succeed post decree.
A Certified Divorce Lending Professional brings the financial knowledge and expertise of a solid understanding of the connection between Divorce and Family Law, IRS Tax Rules and mortgage financing strategies as they all relate to real estate and divorce. Having a CDLP® on your professional divorce team can provide you the benefit of:
- A CDLP is trained to recognize potential legal and tax implications with regards to mortgage financing in divorce situations.
- A CDLP is skilled in specific mortgage guidelines as they pertain to divorcing clients.
- A CDLP is able to identify potential concerns with support/maintenance structures that may conflict with mortgage financing opportunities.
- A CDLP is able to recommend financing strategies helping divorcing clients identify mortgage financing opportunities for retaining the marital home while helping to ensure the ability to achieve future financing for the departing spouse.
- A CDLP is qualified to work with divorce professionals in a collaborative setting.
- A CDLP can provide opportunities in restructuring a real estate portfolio to increase available cash flow when needed.
- A CDLP maintains a commitment to remaining educated and up to date in the ever-changing industry guidelines and tax rules as they pertain to divorce situations.
- A CDLP is committed to providing a higher level of service to you and your divorcing clients.
The role of the CDLP is to help not only the divorcing client but the attorney and financial planner understand the opportunities available as well as the challenges divorce can bring to mortgage financing during and after the divorce. When the CDLP is involved during the divorce process and not after the fact, many potential financing struggles can be avoided with valuable and educated input from the Certified Divorce Lending Professional.
“Nothing matters more in winning than getting the right people on the field. All the clever strategies and advanced technologies in the world are nowhere near as effective without great people to put them to work.” – Jack Welch, Winning
Certified Divorce Lending Professional
This is for informational purposes only and not for providing legal or tax advice. You
should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and subject to market changes.