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From: W on 14 Mar 2010 01:18
I have a friend getting divorced who thinks that his consumer credit score
will deteriorate unless he maintains at least 50% ownership of equity in a
home after divorce. He intends to continue paying the mortgage on the home
and claiming the mortgage interest deduction, which apparently he can
legally do even if he owns 1% of the equity.

He wants to gift the home to the ex-wife after the mortgage is paid in full,
but of course that is a tax disaster, since after 10+ years the gift of his
equity in the home would be a gift to the wife and probably taxable as
ordinary income. If he gifts the equity (or much of it) now then she gets
that tax free at the time of divorce.

To the extent that he gifts home equity at the time of divorce and maintains
a 10% equity ownership in the home and his name on the mortgage, wouldn't he
still get a similar credit score just by virtue of his owning a home and
having a successful payment history on the existing mortgage? I'm trying
to understand if there isn't a way for them to both get what they want here:
the wife wants the equity with minimum tax impact, and the husband wants to
maintain his credit rating tied to his being a home owner.

--
W


From: Gordon Burditt on 14 Mar 2010 05:26
>I have a friend getting divorced who thinks that his consumer credit score
>will deteriorate unless he maintains at least 50% ownership of equity in a
>home after divorce.

By how much, and what does he need a credit score for?

Have you ever seen a percentage of equity listed on a credit report?
I haven't. Have you seen a listing on a credit report for a mortgage
that identifies WHAT PROPERTY is involved, so someone could go look
up the percentage of equity? I haven't. As I understand it, if
it doesn't appear on your credit report (any of the 3), it can't
affect your score (any of the 3).

In general, trying to "buy" a credit score boost by doing foolish things
with money like:
- Taking out a loan you don't need (and paying interest on it)
just to get something on the credit report.
- Carrying a balance on a credit card because it might get you
a point higher credit score.
- Paying an annual fee to keep a credit card you don't need
because you think it helps your score.
- Paying a monthly fee to look at your credit score.

will mostly cost you any savings from a lower interest rate in
money spent on blood pressure medication because your blood pressure
goes up 20 points every time your credit score goes down 2.

It's worthwhile checking your credit *report* periodically for
errors and evidence of identity theft. You can do that for free
(and the web site you do that at does not have the word "free"
anywhere in it (annualcreditreport.com)). Unless you're about to
get a home mortgage, or perhaps an auto loan, paying extra for a
*score* isn't likely to be worth it, and it's a complete waste if
you don't get the real score that lenders use. You don't need to
pay extra for a score to figure out that late payments, bankruptcies,
and foreclosures are not a good thing on a credit report, so don't
do that.

>He intends to continue paying the mortgage on the home
>and claiming the mortgage interest deduction, which apparently he can
>legally do even if he owns 1% of the equity.

That's not obvious from the IRS tax instructions. They say you can
deduct mortgage interest on "your main home or second home". An
ex-wife's home doesn't seem to qualify, unless he's still living
with her. Divorce may be a special case that depends on what the
divorce decree says, so perhaps that's correct.

>He wants to gift the home to the ex-wife after the mortgage is paid in full,
>but of course that is a tax disaster,

tax disaster *FOR WHOM*? There are two people with opposing interests
here, plus the IRS.

>since after 10+ years the gift of his
>equity in the home would be a gift to the wife and probably taxable as
>ordinary income.

I don't think gift taxes work that way. A gift of $XK to his ex-wife
certainly wouldn't be $XK of taxable income to *him*. However, such a
gift might bite by reducing a lifetime deduction on estate taxes at
his death.

>If he gifts the equity (or much of it) now then she gets
>that tax free at the time of divorce.

Property settlements at a time of divorce are generally *NOT*
"gifts", unless you are talking about payments over and above what
is required by the divorce decree. But they wouldn't be taxable.

>To the extent that he gifts home equity at the time of divorce and maintains
>a 10% equity ownership in the home and his name on the mortgage, wouldn't he
>still get a similar credit score just by virtue of his owning a home and
>having a successful payment history on the existing mortgage?

Warning: one of the easiest ways to ruin your credit is to have
it tied up with someone you're divorcing/have divorced. It's not
entirely impossible for her to *deliberately* ruin his credit (even
if hers goes with it) over some disagreement. Things like cancelling
the homeowner's insurance, burning the house down, and walking away
from it come to mind.

>I'm trying
>to understand if there isn't a way for them to both get what they want here:
>the wife wants the equity with minimum tax impact, and the husband wants to
>maintain his credit rating tied to his being a home owner.

I think the "credit rating tied to his being a home owner" beyond
"having a good track record of making payments on rent/mortgage"
is mostly fantasy.

If you are a homeowner, does it say so on your credit report?

Has he considered *buying another house*? Where is he going to
live, anyway? Not with her, I presume. And will he be considered
a homeowner if he pays rent *AND* pays a mortgage?

The fact that I own a home doesn't show up on my credit report any
longer. (It's paid off.) There isn't any report I'm paying rent (I'm not),
either. Am I worried about bad credit? No.

From the point of view of the wife, I wouldn't want him to have equity
for any longer than necessary because who knows when he might hit a bus
full of kids with his car, and owe way more than his insurance will pay.
Or he might die before transferring the equity.
From: krw on 14 Mar 2010 19:57
On Sat, 13 Mar 2010 22:18:49 -0800, "W" <persistentone(a)spamarrest.com> wrote:

>I have a friend getting divorced who thinks that his consumer credit score
>will deteriorate unless he maintains at least 50% ownership of equity in a
>home after divorce. He intends to continue paying the mortgage on the home
>and claiming the mortgage interest deduction, which apparently he can
>legally do even if he owns 1% of the equity.

How could the credit reporting company possibly know how much equity in the
home he has? Are they going to do appraisals every month?

>He wants to gift the home to the ex-wife after the mortgage is paid in full,
>but of course that is a tax disaster, since after 10+ years the gift of his
>equity in the home would be a gift to the wife and probably taxable as
>ordinary income. If he gifts the equity (or much of it) now then she gets
>that tax free at the time of divorce.

Hire a lawyer. For a hundred bucks he might save tens of thousands. ...or
not.

>To the extent that he gifts home equity at the time of divorce and maintains
>a 10% equity ownership in the home and his name on the mortgage, wouldn't he
>still get a similar credit score just by virtue of his owning a home and
>having a successful payment history on the existing mortgage? I'm trying
>to understand if there isn't a way for them to both get what they want here:
>the wife wants the equity with minimum tax impact, and the husband wants to
>maintain his credit rating tied to his being a home owner.

He'll maintain his credit score if he continues to pay off credit. Without
credit his score will go to zero, but that's not necessarily a bad thing. The
equity in the house has nothing to do with it.
From: SMS on 15 Mar 2010 21:46
W wrote:
> I have a friend getting divorced who thinks that his consumer credit score
> will deteriorate unless he maintains at least 50% ownership of equity in a
> home after divorce. He intends to continue paying the mortgage on the home
> and claiming the mortgage interest deduction, which apparently he can
> legally do even if he owns 1% of the equity.

He could have a problem with getting another mortgage (or other loan) if
his name is on the mortgage but not on the title, though not because of
his credit score. He essentially will be responsible for a loan but have
no equity in the property, and the banks could be upset about his
debt/income ratio.

They need to agree who's claiming how much of the interest and property
tax deductions. You can split it up anyway you want between the people
whose names are on the mortgage, but you can't keep changing it at whim
every year, and of course two people can't each claim 100%.

It's best to avoid the situation of being responsible for a mortgage on
a property in which you have no equity (not on the title).
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