The article “Buying a home after divorce” was originally published in MoneySense on May 3, 2022. Photo by Andrea Piacquadio from Pexels.
During a divorce, one or both spouses may move into new homes. A MoneySense reader has a question about her eligibility for home buyers’ tax credits.
I have a question for you regarding the first-time home buyers’ tax credit.
I signed a prenuptial agreement with my now ex-husband that I would not claim ownership of his house he bought previous to the marriage. I did not receive any funds relating to the house when I left.
When we divorced, I needed to find a house. I purchased a home for myself, and I am wondering if I can apply for the first-time home buyers’ tax credit if I occupied the ‘marital’ home during our marriage but had no ownership of the “marital” home. — Shawna
How a divorce can affect buying a house, especially for the first-time buyer
The tax credit you are referring to, Shawna, is the home buyers’ amount (line 31270 of your tax return). An eligible taxpayer can claim $5,000 if they purchased a qualifying home during the tax year.
A qualifying home is pretty much any home purchase, including a house, condo or even a mobile home. The caveat is that you must intend to occupy the home by no later than one year after you acquire it. The home must also be registered in your name (or that of your spouse or common law partner, if applicable) in accordance with the applicable land registry system. The home must be located in Canada.
I think where you are going to run into a roadblock, Shawna, is that your ex-husband’s ownership of a home will disqualify you. A taxpayer can only claim the home buyers’ amount if both of these conditions are met:
- You (or your spouse or common-law partner) acquired a qualifying home.
- You did not live in another home owned by you (or your spouse or common-law partner) in the year of acquisition or in any of the four preceding years (first-time home buyer).
Even though your husband is now your ex-spouse, you did live in a home owned by him during the previous four years. This will disqualify you from claiming the home buyers’ amount, despite the pre-nuptial agreement and the lack of direct ownership or financial benefit.
For what it is worth, the $5,000 credit is not all it is cracked up to be. You only get a tax reduction or refund of 15% of this $5,000 credit, so $750.
Taxpayers who qualify for the disability tax credit, or who buy a home for someone who does, do not have to be a first-time home buyer to claim the home buyers’ amount.
The home buyers’ plan may be an option
The Home Buyers’ Plan (HBP) allows a tax-free withdrawal from a registered retirement savings plan (RRSP) to be used toward the purchase of a qualifying home. This incentive may be more compelling than the home buyer’s amount (tax savings of $750). With the HBP, you can withdraw up to $35,000 from your RRSP, even if you or your ex-spouse or common-law partner owned a home in the previous four years.
Repayments begin in the second year after taking the withdrawal and 1/15 of the withdrawal at minimum is repayable. Otherwise, any underpayment will be included in your income for the year.
This change to the HBP makes it easier for someone whose relationship breaks down to come up with a down payment. You must take the withdrawal no later than 30 days after acquiring the home, so it may be too late in your case, Shawna.
How land transfer tax rebates can help first-time home buyers
Some cities and provinces offer rebates on land-transfer tax for first-time home buyers. For the Toronto and Ontario land-transfer tax rebates, for example, you cannot have owned a home previously, but a spouse’s ownership will not disqualify you if they are your former spouse.
The real cost of real estate after a divorce
I think one of the biggest financial challenges with divorce has to be housing. When couples split, housing costs usually don’t go down by 50%, especially if the kids will be going back and forth between the two houses.
I think people need to be cautious about buying a new home right away. Renting is not necessarily a bad idea until you figure out your new financial situation.
So, while the home buyers’ amount may not benefit you, Shawna, there are other incentives like the home buyers’ plan and land-transfer tax rebates that may be available in a case like yours.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.