For many couples going through divorce, the marital residence is their largest asset.
This article will explore the options to consider in determining what to do with the house.
Is the house a marital asset?
The first thing to ascertain is if the marital residence is a marital asset subject to equitable distribution or division between the parties. If the house was purchased during the marriage using marital funds, it is a marital asset and both parties will be entitled to a share of its equity. If, on the other hand, one party purchased the house prior to the marriage or inherited it as a gift prior to or during the marriage, then the property may be separate. Whether the non-titled spouse is entitled to a share of the equity in the house will depend on several factors. For example, was a mortgage on the house paid for with marital funds? Or, if the parties renovated the house, which increased the value, the non-titled spouse could typically be entitled to 50% of the appreciation as a result of those improvements. If the house was purchased by one party prior to the marriage, but during the marriage the other party’s name was placed on the deed, the property may be considered marital based upon the premise that it was the intention of the titled spouse to convert the separate property into marital property. The party that owned the property prior to the marriage will likely get a separate property credit for the value of the property at the time it was purchased. The benefit of using the Collaborative Process in divorce is that experienced attorneys and financial professionals will be able to provide you with the guidance you need to make informed decisions.
Sell the house now
It may make the most financial and emotional sense to sell the house now, and to share any equity in the house. One of the most important tasks to be completed by divorcing spouses is to figure out what their respective monthly expenses will be once they are living separately. The largest single expense is typically the mortgage. Can one spouse afford to keep the house while the other spouse is now paying the expenses of their own residence? If you have incurred a large amount of credit card or other debt during the marriage, it may make sense to sell the house and use the proceeds of the house to first pay off the debt with the remaining balance being divided between the parties.
The equity will typically be determined by deducting the current balances of the mortgage and/or HELOC (home equity line of credit) on the house, as well as real estate brokers’ fees and other closing costs from the sales price of the house. The net sales proceeds or equity in the house can then be divided between the spouses.
There are also tax considerations. If there will be a capital gains tax on the profit (“gain”) from the sale of the house, and the house is jointly owned, a married couple filing a joint tax return can exclude up to $500,000 in gain if they meet certain eligibility criteria set forth in the tax code. If the parties are each using the filing status “married filing separately”, they may each be able to exclude up to $250,000 in gain on their respective tax returns. The financial professional who is part of the collaborative team will be able to advise you on the tax consequences of your decision to sell the house now.
Keeping the house after the divorce/buy out or sale
If the parties have children, they may decide to keep the house to ease the transition for the children and to provide stability during a difficult time in their lives. The parents may decide to keep the house with one parent residing in the house with the children. The question that comes up is for how many years will they keep the house? Depending on the age of the children, the house may be kept until the youngest child graduates high school or, if the children are very young, the parents may decide to keep the house until a child completes the last grade in a particular school. For the parent who has moved out, the concern may be that they don’t want to remain on the mortgage for too many years and not be able to purchase a home of their own. In the Collaborative Process, we will discuss what your respective needs and concerns are and what would be in the best interests of you and the children.
Once the parties have determined how long they will jointly own the house, they may each want to give either one or both the option to buy out the other party’s share of the equity in the house. The party that wishes to keep the house will either have to refinance the house in his or her name, or assume the existing mortgage, and then pay the other party their share of the equity. Once the refinancing or the assumption of the mortgage has occurred, and the equity, if any, has been paid, the other party will have their name removed from the deed and will have no further financial obligations relating to the house.
Capital gains if one spouse stays in house for many years and then sells- If the parties have divorced, but both remain on the deed and the house is sold after a period of time, the fact that one party has had exclusive occupancy of the house may allow the party who moved out, but is still a co-owner to claim up to the $250,000 exclusion on capital gains. The collaborative team of attorneys and the financial professional will be able to determine if the eligibility criteria with be met with the inclusion of certain language in the agreement, so that the party who moved out may be able to claim the exclusion.
Repairs-One of the concerns that needs to be addressed when one party is keeping the house for a certain period of time is how any home repairs will be paid for. Typically, the cost of cosmetic or discretionary repairs will be borne by the party living in the house. However, if there are necessary or structural repairs, the parties will split the costs in some fashion depending on their respective economic circumstances. If one party can’t afford to pay for the repair now, the other party may pay for the full cost and receive a credit for one-half the cost of repairs at the time of sale.
When it comes time to sell
Prior to putting the house on the market, the parties may need to make repairs or improvements to make the house marketable for sale. Just as with ongoing repairs, the parties will determine how these costs will be shared.
To ensure that the house will be placed on the market for sale at the specified time as set forth in the parties’ separation or divorce agreement, there will be language in the agreement that lays out the process for determining the fair market value of the house. This process may also be used if the parties are not selling and one party is buying out the other party. If the parties can agree on a real estate appraiser/broker, that person will help them set the asking price. But if they can’t agree, or if one party does not want to sell at the agreed upon time and wants to set too high a sales price, or conversely, if the party who isn’t living in the house wants to put the house on the market for a quick sale at too low a price, the agreement will set forth a process by which each party will have a licensed appraiser/broker give them their respective opinion. If the parties still do not agree, the two appraisers or brokers will choose a third appraiser/broker to determine the asking price Once the house is put on the market, there will also be a procedure for setting forth reductions in the price of the house and the intervals at which they will occur, if the parties cannot agree to the amount and timing of price reductions between themselves.
Using the equity in the house as a tradeoff for some other asset.
During the Collaborative divorce process, the professional team will help the parties to explore what each of their desires are and how best to meet their interests. With respect to the house, one party may want to keep it and the other party may prefer to trade off the equity in the house and retain the equivalent value in a retirement plan, a non-retirement brokerage account or some other asset. The collaborative divorce financial professional will guide the discussion of the tax implications involved in trading the equity in the house for a retirement or non-retirement asset and how to equalize the assets.
How the marital residence will be handled in a divorce is not only a financial matter, but it also has emotional underpinnings. The team of collaborative attorneys, a financial neutral and a family support specialist will help each spouse articulate their needs, concerns and long-terms goals so that they can make informed decisions that will meet their particular interests after divorce.
Written by Pamela J. Pollack, Esq.