Divorce pay off

[JenMO]

A farmer and his wife divorce. Farmer has to make settlement to ex wife, so she can buy her own house. Farmer mortgages his farm which his house is on to pay wife. How is the interest treated. Thinking outloud: If home sets on the land and secures the note, wouldn't it be Sch A interest? Under interest tracing laws, I don't think it could be deducted on his Sch F. But he did pay to keep his farm. Could there be an percentage to both?

[erchess]

Showing my ignorance here

What is the difference in terms of impact on his bottom line? The simple thing to do would be to put it all on Sch A. I am sure that treatment is legally ok. I suspect that in most situations that would be as good for the taxpayer as any other course of action. However, if failure to make mortgage payments would cost him the whole farm and not just the house and perhaps some of the land, then to me some portion of the interest could be put on Sch F. If the terms of the mortgage do not specify the FMV of the land actually farmed and the farm buildings vs the rest then you and your client would have to do an estimate. I would think that you would be looking for value at the time the mortgage was taken out rather than current value. I would also think that you could have to defend this course of action so unless the tax savings were significant I would just put it all on Sch A.

[JenMO]

Well, mortgage interest off the Sch F reduces SE tax, that would be the main difference. If we put half on Sch A and half on Sch F, he will only benefit from the Sch F, would not have enough to itemize. But what about interest tracing laws? Would this apply in cases of divorce pay offs?

[Koss]

Property Settlement?

Maybe the farm itself was marital property, that had to be divided between the two spouses...

But she didn't want to leave the marriage and literally own half the farm. And he didn't want that either, because she could sell it off...

So maybe...

Geez, I dunno. The Schedule F business is a sole prop for tax purposes, but maybe the farm that the business was operating was marital property, so...

Maybe the sole prop had to buy her out.

Maybe with this argument you could get it all on Schedule F.

BMK