A spousal buy-out occurs when one member of a divorcing couple pays the other a lump sum instead of conventional alimony payments. There are specific tax implications that come with paying or receiving a spousal buyout. 

When deducting home mortgage interest, for years 2018 through 2025, taxpayers are limited to deducting interest on acquisition debt (up to $1 millions of acquisition debt or the grandfathered debt limit, or up to $750,000 for indebtedness incurred after 2017).

Beginning with tax year 2018 equity debt interest is not deductible. What happens in a divorce situation where one spouse refinances to buy out the other spouse?

Notice 88-74, 1988-2 CB 385 states that, in divorce situations, secured debt incurred to buy out a former spouse’s interest in a home is acquisition debt. This rule is applied without regard to Code Section 1041, which treats certain transfers of property between spouse's incident to divorce as nontaxable events.