Your house could be the most valuable asset (and your mortgage, the largest debt) you and your spouse have to deal with during your divorce. Selling the house is a trying experience in the best of times. During a divorce, and in a poor economy, this already stressful event can become overwhelming.
If you and your spouse are among the fortunate, you may be able to sell your house at a profit before the completion of your divorce and divide the proceeds in an equitable distribution. Yet, even this seemingly simple scenario may pose complicated issues that must be addressed.
For example, if you sell your principal residence (main home) at a profit, you may need to pay taxes on the profit unless you qualify for the capital gain exclusion. Even if you and your spouse jointly own the property, you might elect to file your taxes separately for any number of reasons. Generally, if a co-owner files separately, up to $250,000 of the profit (capital gain) on his interest in the house will be exempt from taxation if that individual satisfies the use and ownership tests for the exclusion. Thus, if each spouse meets the use and ownership tests that apply to co-owners filing separately, each may be allowed to exclude up to $250,000 of his or her share of the profit.
If you and your spouse file jointly, however, you may be eligible for the $500,000 exclusion if you meet the specified criteria, which vary somewhat from those applicable to co-owners filing separately.
In today’s struggling economy, we often hear the terms negative equity, upside-down or underwater mortgage, and short sale. If your house is valued at less than what you owe on your mortgage, you have negative equity, and your mortgage is upside down (or underwater).
If you sell your jointly-owned house at a price lower than your current mortgage balance, you and your spouse will share a debt to your mortgage lender rather than a profit, and the mortgage lender can come after either of you to satisfy that debt.
In some circumstances, your attorney may be able to persuade your mortgage lender to approve what is known as a short sale. Again, the sale price will be lower than the current mortgage balance, but the lender may agree not to come after you for the balance.
If the value of your house is lower than your current mortgage balance (as described above), you and your spouse may decide to wait until the value goes up before you sell, which may mean waiting to sell until after you divorce. This can be accomplished in a number of ways and each has its own advantages and disadvantages.
Couples who face serious financial limitations, yet still feel compelled to get divorced, may be forced to retain joint ownership of the marital home until a sale is economically feasible. If the couple’s financial restrictions are severe enough, they may both elect to reside in the house and lead otherwise separate lives. This option is rife with potential pitfalls and is not often recommended unless there is no other available choice.
If you can afford the costs of living separately but still cannot afford to sell at a loss, a more workable solution may be for one of you to remain living in the house while both of you retain title. Though this arrangement may be preferable to the alternatives, it may still have some unwelcome consequences, all of which should be considered before choosing this as your course of action.
For example, if a couple owns a home as tenants in the entirety during marriage (as most couples in Pennsylvania do), their ownership will change to tenancy in common as soon as the divorce becomes final, and tax ramifications related to the deduction of interest payments may occur. [An explanation of the differences between tenants in the entirety and tenants in common appears at the end of this blog.]
Another important consideration is your level of compatibility. You and your ex-spouse may get along to a certain extent at the time you divorce, but that may change sometime down the road. Difficulties may arise and other personal relationships may develop. Any agreement between you and your ex-spouse should address such contingencies and how they will be resolved.
Decisions need to be made regarding who will pay the costs of maintenance, taxes, and mortgage while dual ownership is maintained. Time and manner of the future sale of the property must be agreed upon. Refusal of one or the other to abide by the terms of the agreement, and how to deal with such refusal, should also be considered.
Among the many issues couples often fail to anticipate are the following: What if the person occupying the house allows someone else to move in? What if you can’t sell at the agreed-upon time? What if the occupying spouse acts in such a way as to discourage a sale that might otherwise have been made? What if one spouse remarries and wishes to sell before a sale is economically advantageous? The list goes on and on.
One spouse may wish to assume sole ownership of the house after the divorce. Such an arrangement is often intended to be temporary—until the children have reached a certain age, for example, or until the spouse who retains ownership feels emotionally strong enough to give up the family home. But, sentimentality and inertia should not be the deciding factors in an asset distribution. The important consideration is whether the spouse who wishes to take over sole ownership can afford the payments, taxes, and upkeep now and in the future without the help of the other.
If you and your attorney determine that one spouse is able to afford sole ownership, that spouse must purchase the other’s interest and obtain financing in his name, alone. This refinancing is crucial.
If one spouse gives up title to the other and the other cannot refinance, the selling spouse is still liable on the original mortgage. If the owner fails to make the mortgage payments, the mortgage company can go after either spouse to satisfy the debt. If the mortgage lender decides to foreclose, the foreclosure will affect the credit rating of anyone still liable on the mortgage, including the party who no longer holds the title. Even if none of these untoward events occurs and the owner makes all the mortgage payments on time, the mortgage still remains a debt for the spouse who has given up title, and this reduces his ability to purchase another property.
The sale of your marital home either before or after your divorce raises many complex issues, only a handful of which have been touched upon here. A sophisticated divorce attorney can help you anticipate and deal with these issues before they turn into thorny problems you can no longer avoid.
[Both Tenancy in Common and Tenancy by the Entirety involve co-ownership of real estate by more than one person, but there are some important distinctions between the 2 types of ownership. Property owned by individuals as Tenants in Common carries no Right of Survivorship. In other words, if one owner dies, the other does not automatically gain ownership of the deceased person’s share. If a co-owner of property held as Tenants in the Entirety dies, however, the survivor does have Right of Survivorship and will automatically acquire full ownership upon the other’s death.
Another distinction involves the rights of co-owners to sell their interest in the property during their lifetimes. Owners of property as Tenants by the Entirety cannot transfer or sell their ownership interests without the other owner’s permission. Owners of property as Tenants in Common, on the other hand, may transfer their individual interests without the consent of the other.]