For most couples, the family residence is one of their largest assets. In divorce, the family home is treated like any other asset, but it is an asset unlike any other. The family home isn’t easily divided. Budgetary concerns and tax issues coupled with emotional ties to the home can lead to catastrophic financial outcomes.
Here are four of the most common real estate issues I see as a divorce financial analyst:
1. “I want to keep the home for the children’s sake”
It is common for a parent to want to keep the home for non-financial reasons such as reducing disruption of their children’s lives during an already difficult time. Most clients who say this are really saying, “I want the children’s lives disrupted as little as possible”. However your children’s emotional needs are met by you, not your house. Your children will be fine with moving if you are ok with it.
Keeping the family home requires upkeep of the family home. Home related expenses (mortgage, taxes, insurance, utilities, and repairs) should be no more than 35% of your projected income. Keeping a house you cannot afford can force you to work longer hours and cut back on other family related expenditures. Ironically, keeping a home can sometimes be the decision that separates you from your children. Wouldn’t you rather spend money bonding with your children on family vacations (or at dinners out) instead of on a hole in the roof?
Finding a more affordable home or rental nearby can reduce disruption for children while easing the cash flow burden for you. Keep an open mind to all possibilities.
2. “The sale of our home will be enough to support me after divorce”
There are several issues here. Can the home be sold quickly the price you expect? What is the value you will receive after the sale? How much will alternative housing cost?
A real estate agent can help you determine the value of your home and whether it can sell quickly. But there is no guarantee. Because you cannot depend on the quick sale of your home, you must have financial resources equal to at least 18 months of expenses while the home is on the market.
The value you receive in divorce is not the sales price, it’s the “equity”. You need to assume that 8-9% of the sales price will be spent on realtor and other expenses to get the sale done. Then “liens” are paid including mortgages, home equity loans, and any other debt or expense that is secured by the home. That may include the contractor that your spouse neglected to pay last year. Be sure you know and understand all liens on the home before you settle your divorce.
Because taxes reduces the value of the home awarded to you in divorce, a financial analyst or CPA should review the value or proceeds from sale. A portion of the difference between the sale price and the purchase price (called the capital gain) is exempt from taxes ($250,000 for individuals or $500,000 for couples) if certain requirements are met. In some states like Illinois, transfer taxes may be required in order to transfer the deed.
3. “Am I liable for mortgage payments after the divorce?” The answer might be yes.
In divorce, debt typically stays with the asset that supports it. Many settlement agreements specify that the spouse awarded the home must refinance the mortgage. But what if your spouse fails to refinance because he or she can’t or just won’t?
Your attorney may specify in the settlement that you can set in and sell the home (and thus extinguish your responsibility for the debt) if your spouse misses a mortgage or property tax payment or takes on additional debt secured by the home. The settlement agreement should also require that the non-spouse owner receive copies of mortgage statement (or online access) until the mortgage is refinanced.
This can be complicated. Consult a divorce financial analyst or an attorney to be sure your credit is protected.
4. “Our house is my separate property, so it can’t be divided in divorce.”
This is a complicated area of the law which depends on many variables. It will be your “burden” to prove that your home is separate property to a judge or mediator. Separate property may be difficult to prove after many years of marriage, especially when there is no specific documentation. Something you think is separate may be marital under the law.
Separate property generally includes property owned before marriage, third party gifts, third party loans and inheritances. While it’s too late for some of you reading this, you can avoid problems by documenting separate property when it is received and how it is spent. Documentation is your best defense.
Divorce Planning of Austin helps couples and individuals project and analyze their post-divorce income, expenses, asset protection needs and the potential tax impact of divorce. We save thousands of dollars with intelligently designed asset division and post-divorce financial planning. Please contact Pam Friedman, CFP®, CDFA™ at pam.friedman@rscapital.com
Robertson Stephens Wealth Management and Divorce Planning of Austin work with clients and their attorneys to help insure that financial accounts are divided in the most efficient manner possible. Please contact Pam Friedman, CFP®, CDFA™ at pam.friedman@rscapital.com
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. This material is for general informational purposes only and is not tailored to the needs of any specific individual. Any discussion of U.S. tax matters should not be construed as tax-related advice. Please consult your personal tax advisor for more information. © 2020 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.