Splitting the marital residence in divorce requires more thought than who will ultimately get the house and how the equity will be split. Often, real estate taxes and the deductions allowed on real estate taxes and mortgage interest are overlooked in negotiations. These should all be addressed in the separation agreement.
Cities and counties in North Carolina operate on a fiscal year that begins on July 1, so tax rates are established by the tax office in the middle of the year. However, the property tax rates are applied in a calendar-year manner. For example, by July 1, 2017 a county sets its tax rate at fifty cents per $100 in value. The owners of property as of January 1, 2017 receive the tax bill sometime in August 2017. Taxes are due and payable September 1, 2017 and may be paid without interest through January 5, 2018.
If a couple separates on July 1, for example, the property taxes for one-half of the year should be treated like a marital debt. During negotiations, the party that has paid or who is responsible for the property taxes during the period prior to separation should get that debt credited to their side of the division of assets and debts. If the divorcing couple has a mortgage where real estate taxes are escrowed, the couple should find out how much has been paid in escrow towards taxes prior to the date of separation. After the date of separation, who is responsible for property taxes depends on who is living in the marital home and who is paying the mortgage payments.
In divorce, tax write-offs are a marital asset just like a house or an investment account. As part of the breakup, the couple has to decide how to divide the mortgage-interest deduction and property tax deduction. It doesn't matter who wrote the check: they can split the deduction evenly or give it to one person. However, ownership is a basic requirement for claiming the mortgage-interest write-off so if the marital home was in one spouse’s name only, only that spouse can claim the deduction.
You must itemize deductions on Schedule A to take the mortgage interest deduction and property tax deduction. It makes sense only if your itemized deductions exceed the standard deduction, which in 2020 is $12,550 for singles filers and married filing separately, $25,100 for joint filers and $18,800 for head of household. If the standard deduction was taken in the most recent year, it’s likely that the same will be done post-divorce, so who gets the deductions may be a moot point.
Generally speaking, it seems fair that the spouse who directly made the property tax payments and payments on the mortgage should be allowed to itemize the deduction on their upcoming tax return. If the home is jointly owned and the taxes and mortgage were paid from a joint account during the marriage, it seems fair that the deductions be split equally.
If the home continues to be owned jointly by both former spouses after the divorce, the IRS allows the mortgage interest deduction to the homeowner regardless of marital status. Both former spouses are entitled to take deductions for half of the mortgage. Once the marital home is transferred to one party solely as part of a settlement, only that ex-spouse may take the mortgage interest deduction.
