How the new tax laws affect the ability to get a mortgage after divorce.
As January 1, 2019 approaches, its time to sit down with a tax expert and gain a clear understanding of how the tax laws will affect each party to a divorce.
Taxation could become a major issue in negotiations,
For some, it could be beneficial to finalize the divorce by December 31. The 3 key divorce-related issues revolve around spousal support payments, itemized deductions, and child tax credits. From a mortgage standpoint, spousal support payments are the most vital issue.
With a passage of the new law, the tax advantage shifts from the payor to the recipient.
Spousal support payments will no longer be a deductible expense for the payor, nor will they be re-portable income for the recipient.
The mortgage advantage also shifts from the payor to the recipient. Under the existing law, those paying spousal support could deduct that amount from their income before their debt to income ratios (DTI) were calculated. Since it was taxable, the recipient would include it in txable income.
Under the new tax law, those paying spousal support may not deduct it from income, but must include it with monthly obligations.
This can shift debt-to income ratios dramatically. Consider a payor with $7,500 per month income, $2,000 in monthly debts, and $1,000 in spousal support. Under old laws, DTI would be calculated as $6,500 income and $2,000 debt: for a ratio of 31%. Under new laws, its calculated at $7,500 income and $3,000 debt, for a ratio of 40%
As you know debt to income ratios are calculated on a pre-tax income, so the recipient can take that non-taxable $1,000 and "Gross it up" by 25% because it is non taxable. "What would have been $1,000 income under the old law non becomes $1,250 under the new law."