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New tax law may affect homeownership after divorce

On Behalf of | Feb 26, 2019 | Uncategorized

Recently we wrote about what to do with the house in a divorce – keep it, share it or sell it.

Changes in the federal tax law that took effect in 2019 may limit the options for divorcing couples. In particular, the drastic reduction in a popular tax deduction may make it harder for New Jersey women to keep the house when they divorce.

Loss of SALT deduction could hurt post-divorce homeownership

Under the old tax law, homeowners could deduct 100 percent of state and local taxes (SALT) from their taxable income on their federal tax returns. This included state income taxes, state and local sales taxes, and local property taxes.

Under the Tax Cuts and Jobs Act enacted by Congress in 2018, the SALT deduction is capped at $10,000 for married couples (or $5,000 for single filers). In exchange, the federal standard deduction was increased from $13,000 to $24,000 (or from $6,500 to $12,000 for single filers).

New Jersey was hit hard by this trade-off. We have the highest property taxes in the country and some of the highest sales and income taxes. If you have a moderate to expensive home, the loss of the combined SALT deductions may be greater than the increase in the standard deduction. The new law also shrinks the mortgage interest deduction on high-value homes. The old cap was $1 million in valuation, the new cap is $750,000. Again this hits harder in New Jersey where property values are much higher.

As a result, divorcing spouses in New Jersey may be hard pressed to afford to stay in the marital home. Sadly, the economic reality of the property settlement agreement may require putting the home up for sale. Statistically speaking, women would be disproportionately displaced by this consequence of the new tax law.

Alimony taxation:  good news, bad news

Another huge change under the TCJA is that alimony is no longer tax-deductible to the payer, and no longer counted as taxable income for the recipient. This is a welcome windfall for the spouse receiving alimony (usually women) and a significant new tax burden for the spouse paying alimony (typically men).

On the one hand, a spouse might be able to afford the house after all if (she) is getting tax-free alimony. On the other hand, the change in the law is likely to take alimony off the table in many divorces. There’s less incentive for the high-earning spouse to agree to alimony, and less money available to pay alimony because more of their income is taxable. Only the federal government wins.

So many variables, but consider the taxes

There are many factors at play in whether either spouse can afford to keep the house. The incomes and tax brackets of each spouse. The valuation, mortgage payments, mortgage balance and equity in the house. Alimony or child support, if applicable. Or simply the level of acrimony and whether the parties are interested in a “win-win” solution.

The takeaway is that it is extremely important that you and your attorney understand the tax ramifications of divorce, especially in light of the recent changes in the law.