DIVORCE

What You Need To About Your House, Your Mortgage And Taxes
How To Avoid Costly Housing Mistakes During And After A Divorce
Divorce is rarely easy and often means a lot of difficult decisions. One of the most important decisions is what to do about your house.  That's where we can help!

Often clients tell what a comfort it is simply to get straight-forward specific information and answers. Once they know how a divorce affects their house, their mortgage and taxes, critical decisions are easier. As a neutral third party, we help them make logical, rather than emotional, decisions.

Probably the first decision is whether you want to continue living in the house. Will that familiar house bring you comfort and emotional security? Or are you ready to sell and move to a new place that offers a new start? Only you can answer those questions.
Just as important, you must determine what you can afford. Can you manage the old house on your new budget? Is refinancing possible? Or, is it better to sell and buy? How much house can you buy on your new budget?

Again, we make it our business to help you answer these questions. Our counsel and market information can help you avoid costly mistakes and smooth your housing decisions during transition.

Straight-Talk About Your Housing Choices

Three Basic Options
Most divorcing homeowners face three basic housing options:

1. Sell the house and split the proceeds. Ask us to analyze your home's market value, then estimate - after selling expenses - how much the home sale will net.
   Be careful not to assume there will be a 50%50 split of the sale proceeds. Your share may depend on your divorce settlement, on the source of the original downpayment money or the property laws of your state. (Most follow equitable distribution principles which may favor a particular spouse, while some are community property or common law states that often result in a 50/50 split.)
   
2. Buy out your spouse's share of the home. Since 1982, the good news is your lender cannot “call the loan" when a property is transferred from one spouse to the other due to divorce. The lender, however, rarely if ever relieves the departing spouse of the obligations of the original mortgage note, even though the spouse no longer owns part of the house.
   
   Often the key to this option is financing. Crunching your income numbers is the answer, and we can help. Remember, sometimes if you used two incomes to qualify for the old loan, refinancing on your own can be a stretch.
   If you can afford to keep up the mortgage payments, upkeep costs and also buy out your spouse,  this may work.
   
   If you are the spouse who is bought out, you have an opportunity to start over in a new place possibly with cash in hand. But if the old loan is not refinanced, nearly all lenders will continue to insist that both co-signers are still liable for the mortgage. This liability may make it difficult for you to qualify for a new mortgage when you go to buy another home, even though the property settlement may say you're not responsible for payments.
   
3. Retain joint ownership of the house for now, even though only one partner occupies it. This option leaves things pretty much alone for the present, and can work if both co-owners can continue to cooperate together after the divorce – which poses it’s own challenges.

If You Decide To Sell
It’s crucial to retain the services of an experienced real estate agent when selling a house as part of a divorce settlement. Both spouses need to cooperate to get the home sold, and that is where it’s especially useful to have professionals like us coordinating preparations for sale as well as contract negotiations. 

When a contract for sale is presented, both co-owners should be available so both can participate in the negotiations and sign the purchase contract. If a joint meeting is impractical, a conference call may be necessary. We can handle the settlement details to bring about a quick and worry-free sale.

What Can You Buy?
Of course, if you decide to sell the family home, you'll want to know what you can afford. You may be pleasantly surprised! First, we'll calculate your total monthly housing cost. To do this, we'll help you add together your costs for mortgage, utilities, insurance, homeowner association fees, local property taxes, maintenance and repair costs. Subtract your homeowner tax savings.

Then we'll take into account all sources of income (including any support payments, subject to certain conditions), the equity you'll receive from the sale of your old house, and today's mortgage interest rates and flexible financing options.  Keep in mind we're in the best position to analyze the market value of your house, the equity you have in the house, how much it will cost to sell and estimate the net proceeds.  We can also create a rent-versus-buy comparison to help you decide which housing route to take. You can rely on us to help you sell your old home and find the right home to buy.

Warning: Taxes Ahead Steer Clear of Tax Traps

Whether you decide to stay put or sell, there are serious tax implications you need to examine.

If You're Selling
Free Ride: In most situations, the tax laws work n your favor regardless of what you do. There is no federal tax on gain from the sale of the house - gains up to $500,000 if a joint return is filed and $250,000 if a single or head of household filing status is used. (State laws vary and state tax could apply to the whole gain or none of it; call us to discuss this.) Any gain larger than the shielded amount is subject to federal tax at capital gain rates, usually 20%.

To qualify, during the five years leading up to the sale date (date of closing), you must have owned the property and the property must have been used as your principal residence for a period or periods totaling at least two years. The periods of personal residence and ownership don't have to be concurrent. That means you would qualify for he benefit in a situation, for example, where you rented the property as your principal residence for two years, moved out and bought it and owned it for two more years and then sold it. You are allowed only one such capital gain tax break in any two-year period.

To qualify for the $500,000, if a joint return is filed, both spouses must meet the two-year "use" requirement-but only one must meet the two-year "ownership" requirement.
Lenient rules now apply in situations where one spouse moves out, but continues to own part or all of her/his former residence. If the house is sold in such a case, the nonresident spouse is considered to be "using" the property as his or her principal residence provided the other spouse has been granted use of the property under a divorce or separation instrument. The period of time after moving out still counts toward the two-year principal use requirement.

If You're Keeping The House
Beware! If one spouse transfers the house to the other during the marriage or "incident to a divorce there are no taxable consequences for the one who makes the transfer. To be "incident to a divorce;" the transfer must take place within one year after the date the marriage ceased or must be related to the cessation of the marriage. But if the transfer is not "incident to a divorce." the spouse who moved out may have to pay capital gains tax when the house eventually is sold (either if the gain is larger than $250,000 or the ownership or use tests are failed).

Alert: Don't blow the $500,000 exclusion. This could happen where one spouse transfers his or her half to the other "incident to divorce:" The spouse who now owns 100% of the house only qualifies for a $250,000 exclusion (assuming the ownership and use tests are met). If the gain is larger than $250,000, capital gains tax will be due on the excess. Planning should be used to see if there is a way to salvage the full $500,000 exclusion - see your tax advisor.

Note: You should seek legal counsel and consult your tax advisor about your specific situation.