Mortgage interest and multiple 1098. Refinanced and used 250K for 2017 divorce settlement.

[tomk39]

Original mortgage in 2012.  Divorced in 2017.   I refinanced in 2020 to remove my spouse from the mortgage and paid her equity on the house (250K) as part of the divorce settlement.   I have 2 1098 forms.

 My refinanced mortgage  is about $250K higher than the original.

1)  Is all the interest that I paid (including the 250K) tax deductible? Or do I need to separate somehow?

2) Where do I input all of this as I'm still trying to figure out how to input two 1098's in turbo tax. (If I use the "workaround" by adding box 1 , interest, and inputting original principal in box 3, it never asks me about a cashout.

original loan $350K (first 1098)

refinanced in 2020.   New mortgage $600K (2nd 1098)

thanks

[AmyC]

1. Was the 250k you paid your wife to buy the house from her? If so, it sounds like that is purchase money. If not, the rules change.

2. If purchase, put in the first 1098 with a balance of $1 since it was paid off in the refinance. Then enter the second 1098 with the full amount.  See Where do I enter a 1098 tax form?(0:36)

[Edit 4/5/2021 | 1:44 pm PST]

[NCperson]

@AmyC - can you please document your response with the supporting website and / or other documentation? It is a weak response to state it 'sounds like' purchase money; folks are making financial decisions on expert advice from TT employees

@tomk39 does not state the ownership of the home is changing, just that he is paying off a $250,000 liability to his former spouse.  If the ownership is not changing there can be no sale.  Presumably the assets were split per the 2017 divorce and now a liability is being paid off. 

Let's say the house was purchased for $400,000 with a $350,000 mortgage.   In the divorce Sam gets the house.  His cost basis remains $400,000.  Further in three years he owes Sarah $250,000; it doesn't matter where the money comes from or what it represents; the two negotiated the money in the divorce settlement

The three years goes by and the mortgage has amortized down to $275,000.  Sam needs to fund $250,000 to pay off his liability to Sarah.  He refinances his home so that the new balance is $600,000.  Of the $325,000 proceeds, he gives $250,000 to Sarah to settle the liability from the divorce decree. 

The 'acquisition debt' remains at $275,000 so the cashout is $325,000.  Since the $325,000 was not used to improve the home (most was given to Sarah), it is cash out and NOT tax deductible. 

lastly, if @tomk39 responses that in fact it was a sale, then his ex-spouse is going to be responsible for capital gains on the transaction.  And since she presumably had not lived there for 2 of the last 5 years, the primary residence exclusion is not going to apply.  

Messy! Talk to your accountant or divorce lawyer - I suspect this was all discussed (or should have been) in 2017. 

p.s. and @tomk39 cost basis probably is the same as when it was originally purchased: 

https://seiler.com/wp-content/uploads/2015/02/Basis-of-Residence-in-a-Divorce1.pdf

[tomk39]

Thank you for the reply.  Sorry I left out information.  I have an appointment to see an accountant but I'll just fill in some blanks in case it helps any.

Yes, the ownership of the home changed from joint (myself and spouse) to just myself when we refinanced in 2020.

We purchase the house in 2011 for 750k

With the sale of our previous residence, our mortgage was about 400k

We divorced in 2017 but lived together for at least 2 out of the 4 years.   I was paying the mortgage the whole time.  In the decree, we agreed to split the equity when the house was sold (or when one of us bought the other out). That's where the $250K comes from.    Interest rates dropped last year so I decided it was a good time to purchase or try and buy her out .  

Sounds like I'd have to calculate the interest on the original mortgage (acquisition dept)  and just deduct that interest.   Have to remember to refi at the end of the year next time. 

Thanks for all the info.  We'll see what the accountant figures out this week. 

[NCperson]

@tomk39 - thanks for the additional facts... and not that I really care (and you may not either) but a good academic exercise, but for the ex to take advantage of the capital gains exclusion for home sales, she would have had to live in the house for 2 of the last 5 years marked from the date of the sale to her in 2020.   

[tomk39]

Thanks for the reply.

Yes, it was to buy her out to get her name off the deed and mortgage (per divorce decree).  Does that mean all of the $250K can be considered as used for purchasing my home?

I've been researching in the forums.  I don't feel comfortable changing the 1098 information I'm inputting in TT.   I've also saw an answer to combine both 1098's.  Both don't seem right.