Spousal Buy-Out Debt

Generally, a taxpayer's home mortgage interest is limited to the interest on acquisition debt and $100,000 of equity debt. In a divorce action sometimes one spouse will buy out the other. Often in these situations, the buying spouse will incur additional debt to buy out the other spouse. The IRS in notice 88-74 has stated that in this situation, the additional debt, secured by the home, to buy out other spouse will be treated as acquisition debt.