Mortgage interest is not alimony does you not need a tax degree to understand that. Still, in some situations it is tried to paint this picture for the tax office.
Mortgage interest is not alimony
We have a limited number of tax deductions. Within this limitation is the mortgage interest deduction and also the alimony deduction. Mind you, only alimony paid for the ex-partner. Children are never a write off, so alimony paid for children is never tax deductible.
The mortgage interest gets connected to the alimony in case of a divorce. When both people own the house and have the mortgage in their name.
EUR 300.000 mortgage on the house that both partners live in. Interest rate is 3% then 9.000 mortgage interest is paid.
Let us assume the partner leaving the house during the divorce is also the person earning the money. The EUR 9.000 mortgage interest is paid by this partner. These interest payments continue to be paid by this partner, even though this person no longer lives in the house.
Mortgage interest deduction problem
The problem is the tax deduction. Mortgage interest is tax deductible if the interest is paid for the house that is the main residence of the tax payer. Clearly that is no longer the case, as the partner that pays the mortgage interest moved out.
The mortgage interest is therefore no longer tax deductible.
Alimony partly solution
The solution to the mortgage interest deduction problem is paying an alimony to your ex-partner who still lives in the house. But this is only a half solution, as this partner who remained behind can only deduct the percentage of the ownership of the house. That implies the full mortgage payment is for 50% deductible in this case. 50% is more than nothing.
The solution is to transfer the house in full in the name of the partner that still lives in the house. Often the person not paying for the mortgage also does not have enough salary to take over the mortgage on the house. Hence this is not always a possible solution.
Alimony full solution
If you are able to transfer the house in the name of the partner leaving behind, then the alimony income is taxable income, but now 100% of the mortgage is tax deductible. The winner, if at all in a divorce situation, of this deal is the partner who no longer lives in the house. The alimony paid is fully deductible, the mortgage interest deduction is limited by the WOZ threshold amount.
Alimony denial court case
A couple divorced on terms of neither paying for alimony to the other. That was fixed in the divorce settlement letter. That said, the house and the mortgage remained in both their names, even though one of the partners had left the house.
The partner living elsewhere paid directly his/her part of the mortgage interest to the bank. Claimed that as alimony deduction. That deduction was denied by the tax office and later the court, as both had agreed on no alimony payments in the divorce settlement.
We think tax-is-exciting, a divorce is not. Nevertheless it is always important to contact the tax advisor before you settle the divorce. Then an alimony payment would have been suggested.
By taking up contact with your tax advisor we strongly suggest each of the partners separately contacts maybe each a different tax advisor. We have had couples in the office that started the divorce fight in front of use again. Little good a tax advisor can do in such situations. No good actually when you explain that the alimony is fully deductible, but the mortgage deduction is limited by the WOZ threshold.
Sorry for the dashes in the middle of the word tax-is-exciting. Apparently Google has a dirty mind and sees only a three letter word that we refer to when we practice to reproduce ourselves. Anything related to that word is spam, hence this devout solution.