The new tax bill and its impact on divorcing home owners
On January 1, 2018 the Tax Cuts and Jobs Act went into effect. This Tax reform bill, the most sweeping rewrite of the tax code in more than 30 years, will have a major impact on divorcing homeowners.
Disclaimer: While this is not tax advice, here's what you need to know from a real estate perspective.
Capital Gains: Earlier proposals of the tax reform bill would have had significant effect on divorcing homeowners, but fortunately, capital gains did not change. There is still a $250,000 (single) and $500,000 (married) deduction for homeowners who have lived in the property for at least two out of the last five years and whose property value has appreciated.
Mortgage interest deduction: Before the new law went into place, homeowners could deduct the mortgage interest accrued on the first $1,000,000 of mortgage debt. That amount has been reduced to $750,000. Previous proposals attempted to reduce that number to $500,000, so $750,000 is better than it could have been!
Taxation changes for spousal support: Under the current income tax rules, spousal support is a deduction to the payor and taxable to the recipient. The new income tax changes will affect spousal support payors, negatively impacting their ability to qualify for buyouts and new home purchases. This is due to the underwriting guidelines which allow for an income tax deduction of spousal support vs applying it as a liability. This may throw off debt-to-income ratios, making some payors ineligible to qualify for a new loan. Conversely, the new law will positively affect the recipient because that income will be non-taxable and can be increases for income-qualifying purposes.