Divorce and the main residence – How does it work tax wise?

A company is a source of income

Tax is exciting, a divorce is not. Lawyers, formalities and trying to cope with each other consumes all your energy. The tax consequences of a divorce are then the least of your worries.  These do need attention as well.

Divorce and the main residence – mortgage deduction

The rule is that a tax resident can deduct the costs related to the loan taken out to purchase the home. From his or her taxable income. A condition is that you need to be living in the house.

Divorce and the main residence

Divorce and main residence – after divorce period

Then the moment comes that the divorce is final. The two partners are officially no longer connected by marriage. That never happens on December 31 or January 1. That implies that during the calendar year part of the year both were married, at least one was living in the house. Part of the year you were not married, hence not fiscal partners. However, the house was still a cost. Who can deduct what?

In this year of divorce the law created the opportunity to choose to remain tax partners for the full calendar year. Even though the conditions for being tax partners no longer apply. One of the conditions is that both partners need to be registered at the same address with city hall. Very unlikely under these conditions. By choosing in the income tax return to remain tax partners, the mortgage costs can be deducted in either tax return by choice.

Divorce and voluntary fiscal partnership

The above mentioned choice to remain fiscal partners during the remainder of the calendar year after divorce solves a practical issue. Often one of the partners actually is able to pay for the mortgage of the house. If that partner pays 100% and can only deduct 50% due to the fact there is no more fiscal partnership. The divorce not only hurts feelings, but also the tax deductions. Hence this solution.

Court case – chosen NOT to use the voluntary fiscal partnership

A couple had a divorce. Basically the wife was so fed up with the whole situation that he could have the house. She owned 50%. The condition is that she is no longer on the mortgage obligation. That was agreed upon in the divorce deed. The notary transferred the mortgage from her name after the divorce became final. The husband settled with the mortgage bank the transfer. Naturally the mortgage bank issued a penalty for this change in conditions of EUR 34.617.

The former wife and husband did not claim in the income tax return to continue for that calendar year their fiscal partnership after the divorce was final. He deducted his part of the interest and the full EUR 34.617 penalty. The tax office disagreed and stated he could only deduct 50% of the costs and penalty, as he had not opted for fiscal partnership after the divorce.

Court case verdict

The court ruled that the divorce agreement stated the transfer of ownership. That the notary has effected that after the divorce. The mortgage rearrangement was done after the divorce. Hence none of what was being deducted was part of the married period. Hence the choice of being or not being tax partners did not affect the costs deducted and the EUR 34.617 penalty deducted. The deduction remained in place and the tax office lost.

Tax is exciting

We think tax is exciting. We experience often that certain aspects of a divorce are mistreated. Pension rights, nearly always waived by the wife, are misunderstood. Lawyers label goods devided between each other as gifts. Nonsense. The tax office? The tax office is eager to deny deductions, if not addressed properly in the divorce agreement.

To both partners in divorce, pay attention to the tax part. If the tax matters are taken into consideration, you can truly address the divorce upon signing as a job well done.

Divorce and partner alimony – how does it work tax wise?

Box 3 debacle

You and your partner decide to get divorced. A difficult time where a lot of aspects have to be arranged. Most of the time, first steps are taken by going to a lawyer and/or a notary who can assist with the handling of the finances. Here you arrange how the finances will be split. You can also include alimony in these arrangements, for both your ex-partner and your children. Divorce and partner alimony, how does it work tax wise?

Divorce and partner alimony

In the year of divorce you can choose whether you and your ex-partner would like to remain tax partners. Remaining tax partners is beneficial if you for instance own a house together. When you remain tax partners, the deductible costs can be allocated in the most beneficial way. The assets can also be allocated in the most beneficial way, if you remain tax partners. This does mean that you have to be on decent terms with each other, as financial information is shared. The result of a joint tax return, you can of course split 50-50 yourself.

Joint tax return or not

If you and your ex-partner are not on decent terms, then above might cause an issue. It is therefore also possible to file separately. Each person claims their part of the property or the assets and pays the taxes accordingly.

Once you know whether you would like to file jointly or separately, you would have to consider what information would be required in order to file your taxes.

The tax return includes the general information, such as your income, your main residence and your assets. On top of that, you might be paying partner- and/or child alimony. Child alimony is not tax deductible as children are considered a (tax)burden. Partner alimony on the other hand, is tax deductible if it is stated in the divorce agreement made either by court or a notary.

Divorce and partner alimony – how does it work tax wise?

Conditions alimony tax credit

If you are paying partner alimony as stated in the divorce agreement, you are allowed to deduct this in your tax return. Meaning, that the paid partner alimony will lower your taxable income, hence this will most likely result in a refund.

If you are receiving partner alimony, you are obligated to include this as income in your tax return. Very likely, that this will result in too pay tax.

Tax is Exciting

We think tax is exciting. The annual income tax return in the first 2 years after the divorce is maybe less exciting for you. Such tax returns are not straight forward. Feel free to reach out if you require assistance and we are able to assist you and your ex-partner with filing your tax returns!

Divorce and tax

Divorce and tax, can there be two more horrible words in one sentence? Probably yes, but this time it is divorce and tax.

Divorce and tax

Divorce and tax go hand in hand. A divorce implies you were married. If you were married you were tax partners for Dutch income tax purposes. A divorce is a very wide subject, so is tax, hence I focus on a couple of aspects I think is important.

Remaining tax partners

The tax system offers the option to remain tax partners for the full tax year during which the divorce took place. This is an important aspect you need to discuss with your ex partner.

Mortgage interest is not alimony
Divorce and tax

We have had the following situation.

The husband and wife are having a divorce, a lawyer is assisting them. It is a business divorce, not a fight divorce, which is good. The husband mentioned to the lawyer that he wishes to have the wife own in full their right now 50/50 owned house. The lawyer replies: that is a gift. The wife states to the lawyer that she waives her rights to the husband pension rights. The lawyer replies: that is convenient.

Divorce, lawyers and tax

This is the moment you need to understand that a lawyer is good at civil or family law, but not tax law. If the lawyer was more aware of tax issues, he would have known that the rights on a pension are huge, much higher financial amounts are involved than the value of the house. Hence his remark, that is convenient.

The reply about the gift is not true either. Between tax partners there are no gifts. Plus, the husband had not intended to name it as a gift, for him he felt morally compelled to leave behind his ex wife well taken care off.

As long as the couple in the divorce are tax partners, the above situation can be executed without gift tax being in place. But the fiscal partnership is more wide than this example, hence we strongly recommend to use the opportunity the Dutch tax office offers to remain tax partners in the year of divorce.

Mortgage interest

The mortgage interest is tax deductible for the house that was purchased and used as main residence. In case of an upcoming divorce it is possible that one of the partners no longer uses the house as main residence. Technically one partner cannot deduct his or her part of the mortgage interest anymore. The other partner cannot simply take this deduction over.

For this situation the rules have included an article that states that in the above mentioned situation the full mortgage interest can be deducted for a maximum period of 2 years, even though not both partners are living at that address.

Alimony and mortgage interest

It does happen that the partner that remains living in the house is not able to purchase the house of the ex partner as the income for the mortgage is not high enough. The couple then decide to leave it as it is and both partner own the house and mortgage. After the mortgage is final, one partner stays behind. The other partner pays alimony. Partner alimony is tax deductible, children alimony is not. You can look at it like children always cost money, divorce or not. The incoming alimony is a taxable income. Against this income you can set off the mortgage interest. However, only 50%, as 50% of the house is owned by the person living in the house.

Divorce for tax purposes

One small silly side note. We are often suggested that a divorce solves a tax issue. Most common example. Partner goes working in Dubai. Dubai knows no tax system. Wife stays in the home they own in the Netherlands. The Dutch tax office takes the standpoint that based on article 4 of any tax treaty the husband has also remained a Dutch tax resident. The tax free Dubai income is then suddenly taxed in the Netherlands.

The suggestion is to get a divorce

Now a risky topic is touched. The husband can mirror to the wife that this is all for tax purposes only, but is it? Is this not a cheap manner to get a profitable divorce, and still run off with a partner the wife was not aware of. That is the message we update both partners of. If you decide a divorce, then treat it as a true divorce. Suddenly the divorce tactic for fiscal purposes is no longer a topic.

Tax is exciting

We think tax is exciting, some are excited about  a divorce. A divorce we never think is exciting. There is always some sort of drama involved and then the tax aspects are irrelevant. Often a second wind will bring parties to the table to also address the tax aspects. We will be glad to assist with the tax return, but please do not start divorce arguments with us present. Which has happened before ofcourse.

Tax divorce and house

Tax divorce and house is a subject that is always a tense subject, nevertheless it needs attention.

A divorce has many consequences, one of them is that one of the partners will leave the house at some point, if the other partner would like to stay in the house. If the house is purchased by both partners, the house is in Box 1 and the costs related to the mortgage can be deducted.

The condition to be able to deduct the mortgage interest is that the house is the main residence. If one of the partners leaves the house, then the house is no longer the main residence. Often the partner staying behind in the house takes over the 100% of the mortgage obligations.

Only 50% mortgage deduction

Tax wise we have a problem. We can only assume the house is not immediately transferred via a notary in name of the partner staying behind, a period is need to make the legal arrangements. For that period the one partner can pay 100% of the mortgage, but as this partner only owns 50% of the house, only 50% of the mortgage costs can be deducted.

In the situation that the partner staying behind cannot take over the mortgage and full ownership of the house simply because not enough income is earned by this single partner, for that period of time only 50% of the mortgage costs can be deducted.

The situation can be even worse. If the income earning partner, let us assume the well earning wife moves out and the stay at home dad continues to live in the house, then the situation is not good. The person able to pay for the mortgage cannot deduct anything, as the house is no longer the main residence of this partner.

In the latter situation we recommend to organize through the proper channels, not between the partners only, that alimony is due to be paid to the ex-partner. So not alimony for the children. This partner alimony is taxed with the partner staying behind. As this partner now has been transferred the full house, the partner can deduct 100% of the mortgage costs, which is set off against the alimony income.

Divorce and joint tax return

The above situation where a partner leaves the house, time going by to have the house legally transferred to the other partner can cost tax deduction, as I explained above. The Dutch tax office offers the one time solutions to file in the year of divorce still as joint tax partners one tax return.

This solution makes that either partner can deduct to the maximum potential the mortgage costs. We understand that you definitely do not want to have contact again with your ex about, but sometimes you need to act business wise and do what is best for both.

Orange Tax – Tax is exciting!

Although we think tax is exciting, a divorce we never think is exciting. A divorce implies many aspects to take into account and in the above article we only focused on one. Basically the message is: file the tax return in the year of divorce jointly to make your tax life a little easier.