Montana: Can Carrying Costs (Mortgage, Taxes) Be Deducted From Sale Proceeds?

Disclaimer: This information is educational only and is not legal advice. For advice about your specific situation, consult a Montana attorney.

Detailed Answer

When co‑owners or divorcing spouses sell real property in Montana, whether mortgage payments, property taxes, and other carrying costs paid by one person reduce that person’s share of the sale proceeds depends on the legal context and the available proof. Key factors are (1) the ownership arrangement, (2) any written agreement between the owners, and (3) whether a Montana court is asked to make an equitable adjustment.

1. Different situations — different rules

• Divorce (marital property division): Montana courts divide marital property equitably. In making an equitable division the court can consider contributions, debts, and how expenses were paid. A spouse who paid mortgage or taxes may receive a credit or other adjustment, especially if the payments came from separate property or if one spouse used marital assets to pay the debt. See Mont. Code Ann. § 40‑4‑202 on disposition of property in dissolution proceedings: https://leg.mt.gov/bills/mca/40/4/40-4-202.htm.
• Unmarried co‑owners or joint owners (sale or partition): If two or more people own property together (tenants in common, joint tenants, etc.), the starting point is the ownership share each holds. Unless owners agreed otherwise, contributions one owner made for mortgage, taxes, insurance, HOA dues, or repairs can sometimes be recovered by asking the other co‑owner(s) to contribute, or by asking a court in a partition or accounting action to adjust the distribution. Montana law provides procedures for partition and related relief where courts can order an accounting and adjustments among co‑owners. See Montana’s partition statutes, e.g., Mont. Code Ann. Title 70 (partition provisions): https://leg.mt.gov/bills/mca/70/29/70-29-101.htm.
• Sale by a single owner who held the mortgage or lien: Lenders and lienholders are typically paid first from sale proceeds (payoff of mortgage, liens, and recorded encumbrances). After payoff and closing prorations (property taxes, utilities, HOA), remaining net proceeds are split according to ownership or court order.

2. What counts as a valid reimbursement or credit?

Courts and co‑owners generally consider these points when deciding whether one person may deduct carrying costs from the sale proceeds or receive reimbursement:

• Was there an express agreement (written or oral) that one owner would be reimbursed for payments? A written agreement is strongest.
• Who held legal title and who obligated themselves on the mortgage? If one co‑owner alone is on the promissory note, the other may still share responsibility, but legal obligations affect priority.
• Were payments for ordinary carrying costs (mortgage interest, principal, taxes, insurance) or were they capital improvements? Reasonable and necessary carrying costs are more likely to be credited; capital improvements typically affect basis and may be treated differently.
• Is there clear accounting documentation (bank records, cancelled checks, HUD/closing statements, mortgage payoff statements)? Documentation strongly supports claims for credit or reimbursement.

3. How a court or buyer’s closing usually handles amounts paid

• First, recorded liens and mortgages are paid out of sale proceeds at closing. The person who paid a mortgage but did not hold title or an equitable lien may still be repaid only after liens are cleared, and only to the extent the closing funds permit.
• Property tax prorations are normally handled at closing: taxes are prorated between buyer and seller for the year of sale. If a co‑owner paid taxes in advance, closing statements and prorations affect who ultimately bears the tax burden.
• If co‑owners disagree, a partition or accounting action can force a court to order an accounting and equitable adjustment among owners. The court may grant credits for payments that benefited the property or for amounts one owner paid on behalf of another.

4. Hypothetical example

Imagine two unmarried co‑owners, A and B, each own 50% of a house. A paid the mortgage and property taxes for two years while B made no payments. When they sell, the mortgage lender is paid first from the sale proceeds. A can present evidence of their payments and ask B to contribute or ask a court in a partition/accounting action for a credit to reflect A’s outlays. If there was no prior agreement, the court will evaluate fairness, benefit to the property, and documentation before awarding any reimbursement.

5. Tax consequences to consider

Payments for carrying costs (mortgage interest, property taxes) generally affect tax reporting differently than capital improvements. For most sellers, capital improvements can increase the property’s tax basis and reduce capital gains; ordinary carrying costs typically do not increase basis. Consult a tax professional about whether reimbursed amounts affect basis or taxable gain on sale.

Helpful Hints

• Keep thorough records: canceled checks, bank statements, mortgage statements, tax bills, insurance and HOA invoices, and any written agreements about payment responsibilities.
• Get a payoff statement from the lender before closing. That figure determines how much of the proceeds are consumed by the mortgage.
• Ask the closing agent for a full HUD/closing statement showing payoffs, prorations, and net proceeds—this document is central to any reimbursement claim.
• Differentiate ordinary carrying costs from capital improvements. Track receipts for significant improvements separately; they may increase basis and affect distributions differently.
• If co‑owners disagree, consider mediation before filing court actions. Mediation is faster and less expensive than litigation and can produce an enforceable settlement.
• If you are divorcing, raise reimbursement claims and the record of payments with your attorney or at the earliest court hearing—timing and full disclosure help the court make an equitable division under Mont. Code Ann. § 40‑4‑202: https://leg.mt.gov/bills/mca/40/4/40-4-202.htm.
• Before spending time and money on litigation, consult a Montana attorney experienced in family law or real property/partition actions. An attorney can evaluate likely outcomes and advise whether a reimbursement claim is strong.

If you want, provide a short summary of your situation (ownership form, who’s on title and the mortgage, whether you have written agreements, and copies of payment records) and I can suggest the most relevant next steps to prepare for a consultation with a Montana attorney.