Acquisition Debt and Divorce - John R. Dundon II, Enrolled Agent
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Acquisition Debt and Divorce

Business Entity Selection and the Tax Consequences of Converting

Acquisition Debt and Divorce

Generally speaking IRS regulations provide that debt incurred to acquire the interest of a spouse or former spouse in a residence, incident to divorce or legal separation, may be treated as acquisition indebtedness under IRC Sec. 163 (mortgage interest deductions) without regard to the treatment of the transaction under IRC Sec. 1041 (spousal transfers).

This debt is considered incurred to acquire a residence. The IRS has ruled it is deductible for both regular tax and AMT purposes.

Acquisition indebtedness interest may also be included on IRS Form 8829 – Business Use of Home – subject to the business-use percentage for purposes of an ultimate Schedule C deduction. But when developing the tax basis in your home for purposes of depreciation deductions, a transfer subject to IRC Sec. 1041(a) is generally treated as a gift for income tax purposes. The transferee’s basis in the transferred asset is the transferor’s adjusted basis immediately before the transfer, even if the asset is subject to liabilities exceeding such basis.