Be Careful What You Ask For…
By AnnaTimone on March 29, 2013
So you’re in the process of divorcing and it’s time to discuss or mediate a property settlement. Emotions are high and tensions are higher; spite may be present in abundance. Your judgment may be a bit clouded right now.
Often the first two reactions are,“I want to stay in the house"and “I want half of his pension.”
Neither of these responses is inherently a bad choice, but there are some things to consider because these choices can be very costly in the short- and long-run.
In the case of the house, do you still have a mortgage on the house? Can you afford to maintain and keep up the house? Can you afford to buy out his share? If he is making payments can you take over if he stops or can’t afford the payments? Have you considered that selling the house (to him or another buyer) may be financially (and tax-wise) very advantageous?
In most cases, the family home is the couple’s largest asset. However, when it comes to your house, first and foremost, know the true market value of the house. Unfortunately, in these economic times and real estate market conditions, your house might worth less than the money you owe to the bank. But you MUST know these numbers, because they will impact your financial decisions. Don’t assume anything and get an appraisalof your house and contact your bank to get a true balance on your mortgage.
Next, in most cases, splitting a home and a mortgage will be aninevitable part of the divorce settlement. Unfortunately, much of the decision will not be made by you, but by a divorce courtthat will allocate the marriage assets and leave the two parties to settle the debt on the home. However, there are three common ways to split the house in divorce.
First, sell your house. And, if you have mortgage, pay it off. Then, divide the profits that remain after sales. It is important to consider the basis in the house and possible capital gains. Especially, right now Congress is seriously considering increasing capital gains tax.So, just be aware.
Second, negotiate a buyout. One spouse buys out the other spouse's interest in the house. Don’t forget the value of a property is considered at the time of sale and not purchase. Now, again if your house worth less than your mortgage, you need to know this. The buyout can be done by trading another asset (including cash) for the interest in the house. If this is the option you are taking and if you have equity in your house,it’s the fair market value of the house minus the mortgage will show the equity in the house However, if your house is worth less than your mortgage, do you have an option to wait for the house prices to go up? Can you rent a house to help youwith expenses? Any other options might be available to you? Or do you want to take a financial loss to go separate ways? Think about it.
What if you decide to keep the house and you find within a short time that you cannot afford to keep it and decide to put it for sale? Should you consider subtracting selling costs and capital gains taxes from the value in the beginning? Seek advice from your CPA, because these are issues that definitely should be considered, especially during current real estate market.
What if you want to keep the house and there is not another asset to offset the value? If possible, you could refinance the house to withdraw enough cash to pay off her ex-husband. But that means you now have a higher mortgage payment. Do you have a good credit history? Can you afford a higher payment?
Instead of refinancing the house, you could owe a sum to her ex-husband, which is paid off over time (a property settlement note). A note should include reasonable interest, and it should be collateralized
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