Divorce and Rental Income

[taxreturn3]

Hello,

My husband and I got divorced in 2022. We purchased a house (primary residence together in 2020. Only his name is on the mortgage and the deed has my name and his name. In the divorce settlement, we agreed on the followings.

1. Keep the current mortgage term (only his name on the mortgage) for 10 years and I need to sell or refinance within 10 years.

2. All sales proceeds will go to me but I will be responsible for mortgage payments and all related expenses

3. His name and my name are on the deed (50% ownership each)

I might need to relocate next year and I am thinking to rent out the house. Here are my questions.

1. Can I deduct mortgage interest since I technically pay his mortgage? I do not know the divorce settlement is sufficient legal proof that I am responsible for the mortgage payment.

2. He is okay with me collecting all rental income, but can I claim 100% rental income on my tax return, or do both of us need to claim 50% rental income each?

3. Can I deduct other expenses such as depreciation, homeowner's insurance, property tax....etc on my tax return? Can I deduct only 50% even if I collect all rental income?

Thank you

[Critter-3]

First you have a legal issue and you really need to talk to a local attorney since some of what you are asking is smelly from many view points and can get you in real trouble in the future no matter how congenial things  are now ... here are my thoughts which are not a legal opinion :

1. Keep the current mortgage term (only his name on the mortgage) for 10 years and I need to sell or refinance within 10 years.  There may be issues with this for him since you will be affecting his credit scores if you don't pay on time or default in the futuree. 

2. All sales proceeds will go to me but I will be responsible for mortgage payments and all related expenses  When you sell all owners on the deed will get a 1099-S to report the sale so you will need to get him off the deed before you sell which he may not allow. 

3. His name and my name are on the deed (50% ownership each) Not an issue except for #2.

I might need to relocate next year and I am thinking to rent out the house. Here are my questions.

1. Can I deduct mortgage interest since I technically pay his mortgage? I do not know the divorce settlement is sufficient legal proof that I am responsible for the mortgage payment.  This is where you  will run into trouble ... although you are not on the mortgage and are not responsible for the payment you may be able to  deduct the interest you pay because you own the property but expect to fight this point with the IRS.  Also if you rent this out you will need to change the homeowner's  insurance and let the mortgage folks know that neigther of you live there anymore and it is now a rental which may not be allowed by the bank(read the fine print in the mortgage document).  You really should get the mortage out of his name if you are keeping it in the divorce ... waiting 10 years may not be possible or wise. 

2. He is okay with me collecting all rental income, but can I claim 100% rental income on my tax return, or do both of us need to claim 50% rental income each?  If you get all the money then you need to claim it all.   He would have nothing to report.

3. Can I deduct other expenses such as depreciation, homeowner's insurance, property tax....etc on my tax return? Can I deduct only 50% even if I collect all rental income?    You can claim all the income and expenses on your Sch E however you can only depreciate 1/2 the house (the portion you own)  which can be a negative to you now and an issue for him later. 

Bottom line ...  seek local professional assitance before you do anything.  Keeping unneeded  ties to each other after a divorce is a recipe for disaster. 

[taxreturn3]

Thank you for your response....I have an additional question before I seek a local specialist's advice...

"When you sell all owners on the deed will get a 1099-S to report the sale so you will need to get him off the deed before you sell which he may not allow. "

I was told he cannot take off his name from the deed because his name is on the mortgage and his mortgage company will not allow us to do so. What is the issue here?  It sounds like 50% of sales proceeds will go to him if he receives a 1099-S although our settlement says all proceeds go to me. Is that what you are suggesting?

[Opus 17]

The problem is you are changing the terms of the agreement significantly.  The tax treatment of the sale in the future is very different for a rental than for a personal residence.

1. Generally, the IRS will assume that co-owners each own a 50% share unless you can prove otherwise.

2. If you sold your personal residence that you lived in as your main home, you can exclude up to $250,000 of the capital gains from income tax.  Your ex can also exclude $250,000 of the gain from taxation even though they no longer live in the home, as long as you qualify for the exclusion AND he was living there before the split.

3. However, with a rental property, you must pay the capital gains tax on your half of the gain, whenever you sell.1  You lose the capital gains exclusion, unless you sell within 3 years of moving.  Your ex will have to pay capital gains tax on his half of the gain per item #1, unless you can show otherwise.

4. You will essentially have a rental partnership with a silent partner; you want one partner to actively manage the rental unit and collect all rent and keep all the income, while the other owner is a silent investor only.  That's a business relationship that is much more complicated than if you owned the home undivided, or if you owned the home together but were still married.

5. Does your mortgage allow you to rent the property?  I'll bet it has a clause that you must be an owner-occupier.  If you rent without refinancing or getting the lender's approval, you may be in default and they can foreclose at will.  

6. You're going to be an absentee landlord?  Have you ever done that before?  Do you have any idea how much more expensive that is (how much less profit) then if you are local?

This is what I would tell your ex:

Get out now.  Refuse to allow the rental unless your ex buys you out and takes your name off the deed and off the mortgage.  There are big liability problems with rentals (tenant damage, injury, etc.).  What do you (the ex) gain by assuming that level of risk for the indefinite future?  How does that risk get paid off?  What do you gain for being liable for the property and the mortgage?  Suppose your ex-wife loses their job and can't pay the mortgage?  Now you are liable for a property and a mortgage, with tenants you probably can't evict.  If your ex can't refinance, then sell the house before relocating. 

What I will suggest to both of you is that you need legal and tax help before you do this.  You might be violating your mortgage.  You are certainly creating tax complications.  The tax complications could be addressed by forming an LLC or a partnership with written documentation of who is responsible for what, that would allow you to file your tax return in the way you propose.  LLCs and partnerships with a person you are not married to are filed very differently from the joint tax return you are used to. 

[Critter-3]

You have a situation that is a can of worms and I agree that the EX (although he seems to be reasonable) is opening himself up to a lot of liabilities and you both need to get professional assistance to understand this matter better  if this was not already addressed in the divorce document. 

[NCperson]

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