Question: How does the mortgage interest deduction work when the parties are separated?
Answer:
It depends on whether the parties hold the asset in joint title, or whether only one party is the owner.
Joint title
If the parties hold the property in joint title, half of the mortgage payers' payment counts as alimony income to the other party.
The other party then also gets a mortgage interest deduction of half of the mortgage interest paid. (The first party gets the other half, only.)
There is an option in the software to automatically make this happen, as shown below.
This option is on the Mortgage "more info" screen:
One party owner.
Let's say the husband is the owner.
Let's say, further, that the husband and pays the mortgage but does not live in the residence, and the parties file separate returns.
In this case, the husband's ability to deduct mortgage interest depends on whether there is a written separation agreement that gives the wife the right to live in the home.
If there is such a written separation agreement, then the husband can deduct the mortgage interest that he pays. This is because he is treated for tax purposes as having the home as his principal residence.
If there is no such written separation agreement, then the husband could try to claim the property as a second home.
It would have to be the case that he has no other second home.
He would have to live in the home for more than 14 days (assuming the home is not rented out).
Otherwise, it would not be permitted to deduct the mortgage interest, even though he is the one paying it. This is because the interest is not on his principal residence or a second home.
In Family Law Software, if the checkbox shown above is not checked, then the software gives the mortgage interest deduction to the payer without regard to ownership.
If the husband has moved out, and is paying the mortgage, and there is no separation agreement, you may need to override the mortgage interest deduction on the View/Edit Taxes screen, to set the husband's mortgage interest deduction to zero.
If the parties are filing jointly, then all of the interest may be deducted on the joint return, as long as one of the parties lives in the residence, even if it is the other party that pays the mortgage.