In most divorces the continued joint occupancy of H and W while a sale of the family residence is pending is a nonstarter. Besides most divorcing couple’s inability to continue to live together, other complications quickly develop. Under IRC §§71(b)(1)(C), 215(a)–(b), the parties may not be members of the same household if deductible spousal support payments from the income of the paying party are desired. Also the date of separation, which has tons of ramifications on the divorce discussed elsewhere becomes harder if not impossible to legally identify where the couple continues to live under the same roof. However, when couples are amiable enough for joint occupancy to be a possibility, this can often reduce the economic burdens caused by having to duplicate living expenses while the divorce is pending and afterward.
In order to evaluate the economic effect of a divorce or separation agreement obligating one party to pay all housing costs, including mortgage payments, taxes and maintenance the tax treatment of these payment must be taken into account. The tax savings may be substantial and can provide some leverage in marital settlement negotiations. Three different IRC sections dictate the tax treatment of divorce-related payments of housing costs related to the marital home.
The deductibility of home mortgage interest is governed by § 163(h)(3) and § 163(h)(4), the deductibility of property taxes is determined under § 164 and alimony is determined under § 71. Court ordered payments to third parties commonly include payments of mortgage interest and property taxes on behalf of a spouse or former spouse. These expense can potentially be treated as alimony for tax purposes which would give rise to an above-the-line deduction to the payor spouse and escape a potential § 68 overall limitation on itemized deductions if the payments were not considered alimony.
If the spouse awarded occupancy of the martial residence co owns an interest in property with the payor spouse, any payments of housing costs qualify as alimony only to the extent of the payee’s ownership interest. Where a home is jointly owned the payor’s payment of housing costs on behalf of the payee qualifies as alimony only to the extent of the payee’s one-half interest. Here, these expenses do not qualify as an itemized deduction because of § 68, do not result in a benefit because the payor spouse is in AMT and do not qualify as alimony, they will generally constitute nondeductible personal expenses.
Under § 71(b)(1), alimony by definition includes qualifying cash payments to third parties on behalf of a spouse where the payments are legally required under a qualified divorce instrument. In order for the payments to be considered made “on behalf of a spouse” the payments to third parties must be made at the written request, consent, or ratification of the payee spouse. The writing must make clear the parties intend that the payments be treated as alimony and executed prior to the date of filing of his federal income tax return which pertains to the payments at issue.
Payments to third parties that can qualify as alimony include any payments of what constitute legal obligations of the alimony recipient spouse, including rent, tuition, legal liabilities, food, clothing, medical and other living expenses, vacations, education, jewelry and life insurance premiums where the payee spouse is the owner of the policy.
Taxpayers on occasion have been known to attempt to deduct the payment of their ex spouse’s attorney’s fees as alimony. However, these expenditures will not qualify as alimony unless they meet all the legal requirements for payments to a third party delineated above.