Application in Divorce
In many divorces, one of the biggest questions is, What about the house that had been the couple’s home? On the asset side of a marital settlement, the house and the pensions are often the two most valuable assets a divorcing couple must divide and distribute. Like so many problems of a divorce, the disposition of the family home can be charged with emotion, particularly for the wife who made the home a nest where she raised the children.
Since the house is very often the largest marital asset, sale is often the only option if both parties are to receive an equitable share in the distribution of joint assets. One the other hand, when the marital
estate is large enough, judges are very inclined to award the house to the custodial parent (who is usually the mother).
Judges may consider other
factors in awarding the physical house and land to one party. These include the personal attachment of one spouse; greater contributions by one spouse to its acquisition; upkeep (no small consideration in a time of "starter castles" and "Macmansions").
In general, therefore, couples have three choices. They can 1) sell the house and split the proceeds; 2) agree to have one spouse by out the other’s
interest as part of the overall settlement; or 3) continue to own the house jointly. Each of these approaches has advantages, depending upon the situation of the divorcing couple, but in all cases both husband and wife are advised to think about the long-term consequences of their decision.
Selling the house, a very common course, raises possible tax considerations, the problems of renting versus buying, and getting a new
mortgage. At the least, both parties should know the basis for the property -- the original cost, minus improvements. Under current tax laws, each spouse may exclude up to $250,000 (or $500,000 as couple) from any capital gains tax if they have lived in the house for any two of the last five years.
A buyout by one spouse requires that the house be appraised independently. In this routine, after an
appraisal, some couples dividing marital property often use a property settlement note. In this arrangement, one spouse pays the other a sum for a negotiated length of time at current interest rates. The money is a division of property, so it is not taxable. The recipient does pay taxes on the interest, not the principal. The note is normally collateralized. Some divorcing couples do not like the fact that they are now in a debtor-creditor relationship.
A buyout gets one spouses name off the title, but it normally leaves his or her name on the
mortgage. This may have an impact on a party’s credit rating.
Joint ownership often appeals to couples who want to keep their children in the same house until they finish school. In this arrangement, when the divorce happens, the couple become
tenants in common, which means they both own half the house. Normally, the couple work out arrangements whereby one party, the one who stay in the house, pays the mortgage, while all other costs are split evenly. When the children finish school, the parties sell the house and split the proceeds. Some divorcing couples may not like this arrangement because it makes former spouses business partners.
If the house must be sold, the provisions of the sale should address how, when, by whom and in what manner that sale is to happen. These terms and conditions become even more important now as the housing market slips into the doldrums.
Very often, when minor children are involved, their needs weigh heavily on a court in the distribution of a house that can accommodate them and their custodial parent, who is usually their mother. In addition, when weighing the distribution of a house, courts may consider a number of factors, including the
attachment one party has to the house, the cost of upkeep, the availability of other assets, the encumbrances on the property, and the reduction of friction between the spouses through a property division.
For some couples the place they called home can be emblematic of the marriage, and here a note of caution is in
order. A home is a state of mind and a habit of the heart; a house is a building on a piece of land. The word home is warm and fuzzy; house is cold and angular. No one can every sell or buy a home because it must be made by the people who live there and who love and nurture each other. In the emotional tsunami of divorce, couples often act out melodramas of vindication that makes the house the symbol of the home, which now moves into the realm of a bittersweet memory of what was but is no more and will not be again. The decision to keep a home requires thinking long term and short term. Courts are very inclined to award the house to the wife so that school-age children experience the less disruption by the breakup, particularly in states where judges have discretion in the equitable distribution of property. This means that the equitable distribution of property may result in the marital home going to a mother even when that division of property is not exactly equal in dollar value with property awarded to the father. In a divorce, the person awarded the marital home should be certain that he or she can afford to keep it, particularly now when the housing market is in the doldrums (and unlikely to improve dramatically for some time). Many times, women who keep the marital home find themselves house-poor.
For most owners, a house is a barren asset. Despite the availability of home
equity loans, for most owners a house pays nothing until it is sold, and the only proof-positive way to determine value is to sell the house. In general, when a couple sell the marital home as part of a divorce, they divide the equity of the house, which is the market value minus the value of any mortgage. This means they divide the net sale proceeds. The real estate commission and other costs, which may be considerable, are not taken into account unless the sale of the property is reasonably foreseen.
Houses generally appreciate, but when they do, the taxes on it increase when the property is reassessed.