Home Equity Payout - Tax Questions

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Home Equity Payout - Tax Questions

Unread postby Snowblower » Thu Dec 14, 2017 4:19 pm

I am keeping the house. I have to give my STBX 50% of home equity. The last appraisal I have is right at 224K with 144K remaining mortgage from the day of filing. The payout will be between somewhere of 10K to 30K because she is getting equity from vehicles and IRA's etc. OC says I should refinance for buyout. My council says I don't have to. I will also have to give half of my 401K which is about 70K and from this I would like to give the additional 10K to 30K along with an additional 25% to that equity value to include the tax penalty ~(15%) and also IRS penalty (~10) for pulling it out. What I was told yesterday was that the new tax plan will no longer allow deductions with home equity lines and loans so this would be a bad idea. I already have a HELOC on standby but now it might make sense to not use that all and just refi since I can still deduct. Does anyone have any experience here? Accountants are really busy at this time of the year to get an ear. State is IN.

Has anybody heard of some of the changes to the tax code that might affect in process divorces?
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Re: Home Equity Payout - Tax Questions

Unread postby a dad » Thu Dec 14, 2017 7:18 pm

The tax proposal changes weekly and isn't given much time for review so it's tough to tell. You may need to dig in to the most recent proposal.

I understand it will eliminate property tax deductions, SS deductions, per child deductions, and it looks like up to $100k of home equity loans as of a couple days ago.

"Among the changes that could affect everyone: The Senate bill limits homeowners' ability to deduct interest on up to $100,000 of home equity loans and lines of credit. "
https://www.consumerreports.org/taxes/h ... ownership/

We had a thread about other aspects recently:
viewtopic.php?f=8&t=79840
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Re: Home Equity Payout - Tax Questions

Unread postby hoosier_dad » Thu Dec 14, 2017 11:16 pm

Snowblower wrote:I will also have to give half of my 401K which is about 70K and from this I would like to give the additional 10K to 30K along with an additional 25% to that equity value to include the tax penalty ~(15%) and also IRS penalty (~10) for pulling it out.


Your wording is hard to follow. It sounds like you would be giving your STBX 1/2 of your 401k or about 70k, plus an additional 10-30k of the 401k to cover home equity. This would all be done via a QDRO and would be tax free on both ends, but you go on to describe tax penalties. What are you expecting tax penalties on?
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Re: Home Equity Payout - Tax Questions

Unread postby TJinCA » Fri Dec 15, 2017 12:06 am

I think (but am not sure) that if you have a QDRO that's worded correctly you can make a withdrawal from your 401K pursuant to a divorce decree and not have to pay the penalty. I imagine you'd still have to pay the tax as ordinary income. But you really need to talk to an expert in divorce finance to be sure, and to make sure the QDRO is done correctly--I don't think I'd trust a general family law attorney to get that right, I'd go with a specialist for that specific document.

If your wife's name is on the mortgage you'll either need to assume the mortgage in your name only (if the lender will allow this) or refinance to get her off the loan. If she's smart she'll insist on being removed from your mortgage liability, and if you're smart you'll insist on getting a quitclaim deed from her as part of the transaction.

So if you're going to refinance anyway, the simplest way (if you can qualify) would be to cash out the additional $10-30K for her equity as part of the refinance and give it to her in cash. That's a transfer of property so there would be no tax implications for either of you, and that would be rolled into your new mortgage so the interest on it would be deductible for you. If your credit is good most lenders will go up to 80% of value and if you're refinancing $144K + $30K you're still below that so you should be OK.

I think the elimination of the HELOC deduction was in both the House & Senate versions of the tax plan, so it sounds like that will be a part of the final bill--assuming that a final bill passes.
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Re: Home Equity Payout - Tax Questions

Unread postby Snowblower » Fri Dec 15, 2017 9:19 am

a dad wrote:The tax proposal changes weekly and isn't given much time for review so it's tough to tell. You may need to dig in to the most recent proposal.

I understand it will eliminate property tax deductions, SS deductions, per child deductions, and it looks like up to $100k of home equity loans as of a couple days ago.

"Among the changes that could affect everyone: The Senate bill limits homeowners' ability to deduct interest on up to $100,000 of home equity loans and lines of credit. "
https://www.consumerreports.org/taxes/h ... ownership/

We had a thread about other aspects recently:
viewtopic.php?f=8&t=79840


What I was looking for, thanks. Important need to know for decisions now. Interesting, there is a court order that my spousal support was signed and started this month instead of next month, so I can I assume I will be able to deduct that and she has to claim everything for next year. I am not sure if that is good or bad for me yet based on the new standard child deduction increasing to 18,300. I am not a tax guy but it sounds like those on hear that pay tons of support and may exceed that are going to be ticked but those that pay under that per year will benefit.

hoosier_dad wrote:Your wording is hard to follow. It sounds like you would be giving your STBX 1/2 of your 401k or about 70k, plus an additional 10-30k of the 401k to cover home equity. This would all be done via a QDRO and would be tax free on both ends, but you go on to describe tax penalties. What are you expecting tax penalties on?


I am not expecting any penalties because the QDRO allows me to transfer that money to her tax free to her own 401K or IRA. If SHE chooses within the QDRO to pull the money out then the company that manages this will withhold 20% and then she will also have to pay a 10% penalty. It was thought she could use this money and not pay the 10% fee because of first time homebuyer rule but I heard this might be gone next year. This is her problem but the reason I care is because she has not accepted my MSA because she is uncertain of the penalties and is being told she will be losing all of that money. If she could figure out a way to split this over two years and would have taken my offer months ago she could have stayed in the lower tax bracket but now because she is going to have to use it all at once along with SS and expected higher income she will go up from the 12-15% bracket to the 25% bracket.
http://www.businessinsider.com/tax-brac ... on-2017-11

TJinCA wrote:If your wife's name is on the mortgage you'll either need to assume the mortgage in your name only (if the lender will allow this) or refinance to get her off the loan. If she's smart she'll insist on being removed from your mortgage liability, and if you're smart you'll insist on getting a quitclaim deed from her as part of the transaction.

So if you're going to refinance anyway, the simplest way (if you can qualify) would be to cash out the additional $10-30K for her equity as part of the refinance and give it to her in cash. That's a transfer of property so there would be no tax implications for either of you, and that would be rolled into your new mortgage so the interest on it would be deductible for you. If your credit is good most lenders will go up to 80% of value and if you're refinancing $144K + $30K you're still below that so you should be OK.

I think the elimination of the HELOC deduction was in both the House & Senate versions of the tax plan, so it sounds like that will be a part of the final bill--assuming that a final bill passes.


House deed has only my name on it so no paperwork needed there. Months ago I knew I would need something so I secured a 50K HELOC because it was flexible, offered low interest only payments, interests was deductible and that I will need since I am being ra*&^% and I would only need to use when I absolutely needed to. In fact, I still have not used anything on it as yet.

Sounds like the smart things to do would be to get a cash out for ~$30K because then based on what I am hearing the interests would still be deductible since the value is over 100K. I would prefer to just push more money out of the 401K because it there, 25 years till I retire so I can make it back up where paying a higher interest rate on the property and the high fees for doing the refi impact me now. Three months ago to keep the same rate was points fees of about $5K. Not only that I have a really good rate on my mortgage right now I do not want to lose.
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Re: Home Equity Payout - Tax Questions

Unread postby TJinCA » Fri Dec 15, 2017 10:33 am

Snowblower wrote:
a dad wrote:The tax proposal changes weekly and isn't given much time for review so it's tough to tell. You may need to dig in to the most recent proposal.

I understand it will eliminate property tax deductions, SS deductions, per child deductions, and it looks like up to $100k of home equity loans as of a couple days ago.

"Among the changes that could affect everyone: The Senate bill limits homeowners' ability to deduct interest on up to $100,000 of home equity loans and lines of credit. "
https://www.consumerreports.org/taxes/h ... ownership/



What I was looking for, thanks. Important need to know for decisions now. Interesting, there is a court order that my spousal support was signed and started this month instead of next month, so I can I assume I will be able to deduct that and she has to claim everything for next year. I am not sure if that is good or bad for me yet based on the new standard child deduction increasing to 18,300. I am not a tax guy but it sounds like those on hear that pay tons of support and may exceed that are going to be ticked but those that pay under that per year will benefit.


In the article cited above, note that the Senate bill allows you to deduct interest on up to $100K of HELOC, but only if you use the proceeds for improvement of your primary residence. If you use the cash to pay off your share of property settlement it won't be deductible.

House plan eliminates the HELOC deduction entirely. I haven't seen anything on what came out of conference yet.

Bottom line is that your ability to deduct HELOC interest is unlikely, I wouldn't count on being able to deduct anything. Still might be the best way to go if you've got a good rate on the HELOC though (and if you don't have to refinance anyway, see below).

House deed has only my name on it so no paperwork needed there. Months ago I knew I would need something so I secured a 50K HELOC because it was flexible, offered low interest only payments, interests was deductible and that I will need since I am being ra*&^% and I would only need to use when I absolutely needed to. In fact, I still have not used anything on it as yet.

Sounds like the smart things to do would be to get a cash out for ~$30K because then based on what I am hearing the interests would still be deductible since the value is over 100K. I would prefer to just push more money out of the 401K because it there, 25 years till I retire so I can make it back up where paying a higher interest rate on the property and the high fees for doing the refi impact me now. Three months ago to keep the same rate was points fees of about $5K. Not only that I have a really good rate on my mortgage right now I do not want to lose.


If you're the only one on the deed that saves you some paperwork for the quitclaim, but if her name is on the mortgage you'll still need to do something to get her off. In most cases that means refi. Cost of the refinance should be a marital expense split evenly between you, but if your rate goes up that's all on you going forward.
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Re: Home Equity Payout - Tax Questions

Unread postby Snowblower » Fri Dec 15, 2017 12:24 pm

I had bought the house in my name prior to marriage so her name is not on the mortgage or deed or anything.

Thanks for clarifying the HELOC, I can leave it open as a rainy day but sounds like it does not make sense from this point moving forward. Lenders are probably freaking out.

Looking into this more it might make more sense to just do a refi for the same rate and include the expenses from the loan we half. Short term hurts but in the long run leaves more in my 401K. Doing the math now and will see how this impacts me. The thing that sucks is that rate just went up yesterday .25 by the fed :oops: :x
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