This blog post is from Ronnie McClure, a collaboratively-trained financial professional and mediator located in Lewisville, TX. He holds academic degrees in economics, accounting, taxation, family counseling, and conflict resolution, and is a certified public accountant and a nationally certified counselor. He is a member of the American Counseling Association, the International Association of Marriage and Family Counselors, the Collaborative Law Institute of Texas, and Denton County Collaborative Professionals, where he serves as vice president. He currently serves on the Advisory Council of Communities Foundation of Texas and the Governing Board of the Dallas Estate Planning Council.
The marital home is typically the largest asset a couple owns, and is frequently a sticking point in divorce property settlement. Typically, the options are toeither sell it, award it to one of the parties with the existing mortgage, or refinance it. But because emotional attachment to it as a home may outweigh the financial considerations of it as a house and asset, disposition of the family residence is often one of the most difficult issues in settling a divorce.
Considerations for selling the home
Selling the home may provide the couple cash needed for the overall property settlement, if there is sufficient equity to cover costs of sale. Prevailing market conditions in the area will certainly impact this decision. In a down market, homes move slowly, which might interfere with the timeline a couple might want for its divorce. Also, a house for sale in a down market may not bear the selling price a couple needs in order to meet immediate financial objectives.
Agreeing to put the home on the market and sell it after the divorce, with some agreed-upon split of the net proceeds, is fraught with numerous legal and financial issues. Will one of the parties remain in the home until it is sold? Which party will pay the mortgage, and for how long? Which party will be responsible for ongoing routine maintenance while the home is on the market? From what funds will the mortgage, taxes, insurance, and maintenance be paid? If there are no net proceeds from the sale, how will the deficit be split? Which party will get the income tax deductions associated with deductible expenditures? These issues must be spelled out in the final divorce decree.
There are typically “fix-up costs” to be incurred before a home is put on the market. While every situation is different, realtors typically recommend addressing deferred maintenance items, such as rotted trim, broken sprinkler system, dried caulk in showers, holes in the walls, and badly worn carpet. If the couple’s budget and time considerations allow, they may want to do some minor updating. A couple needs to ask if it has the resources to incur those costs.
The Internal Revenue Code provides an exclusion from gross income of $500,000 of gain for the sale of a personal residence by a married couple filing a joint income tax return and that meet certain residency requirements. That amount drops to $250,000 for a single person. If there is significant gain to be realized on the sale of the home, it may be more advantageous to sell it while they are still married.
The Internal Revenue Code also provides a “first-time homebuyer credit” of up to $8,000 for homes purchased during specified periods. There may be a requirement to repay some or all of that credit as additional tax if the home is sold within a specified period. If a couple is subject to that “recapture” of the credit, which party will bear that additional tax? How does recapture of the credit affect the economics of selling the home?
Considerations for keeping the home
Frequently, one of the parties wants to keep the marital residence due to an emotional attachment or to provide stability for children. Can this person afford the mortgage payment, insurance, property taxes, utilities, and routine maintenance and improvements? Accurate records of past expenditures and future budget projections are important in making the decision to keep the home.
Valuation of the property is more difficult if one of the parties keeps the home. Should the value be based on a formal appraisal which may consider only a limited number of homes sold within a specified period, or the valuation by a real estate agent that may take into consideration of similar homes in the area remaining on the market? Frequently, in the collaborative law process, negotiations start with the tax roll value of the property. Once the couple has agreed upon a basic value for the property, one party may want that value reduced by the fix-up and closing costs that would otherwise be incurred if the home were sold. In collaborative proceedings, the parties are more likely to cooperate in establishing property values.
If there is substantial equity in the residence, what other assets are available to provide fair and equitable division of the marital estate? Frequently, equity in the marital residence is the couple’s primary asset. An imbalance here could result in the spouse who is awarded the home making payments to the other spouse over a period of years as part of a fair property settlement.
Considerations for refinancing the home
This viable option is frequently not considered in divorce. Refinancing may provide cash to facilitate property settlement or simply to get one of the parties off of the mortgage. It may be beneficial during the divorce process to bring in an expert in refinancing to provide valuable information and assistance. While the basic options of keeping or selling the residence are limited, creative collaborative planning can produce an outcome that best meets the financial and emotional needs of the couple.