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Dividing Jointly-Titled Real Estate

Rights with respect to real estate are another common source of misunderstanding by laypersons. Here are a few "tidbits" of hopefully-helpful information regarding these matters.

As to the time for settlement of interests in jointly-titled real estate and some related matters, it is true that, if these matters must be fully litigated, at the end of the divorce case, at the final "equitable distribution" hearing, if one of the spouse thus demands, even a jointly-titled marital residence will, virtually always, be subject to "partition" by the Court (i.e., if there is not other marital property of sufficient value to allot to the other spouse, something akin to a forced "foreclosure" sale may be ordered). Where the (Northern Virginia) case is in fact fully litigated, however, it probably will be at least 1 1/2 - 2 years after the final separation before that results.

Consequently, the spouse who is primarily interested in pulling his or her share of the "equity" out of the jointly-titled property (and/or in terminating the drain of a high mortgage payment) -- should consider it a "bonus" if in fact it is agreed that the property will be sold (or his or her interests purchased by the other spouse) in a significantly shorter period of time. Conversely, if it is agreed that the property need not be sold (or the interests of one of the spouses bought out by the other) for a significantly longer period of time, the spouse who is most desirous of keeping the property jointly-titled should consider that provision a "bonus" to him or her.

In the latter connection, though, an important caveat should be noted. First, that is, after ("absolute") divorce, jointly-titled property becomes subject to the individual debts of either spouse (and hence, perhaps, foreclosure sale by the creditor); consequently, where the time of sale or buy-out regarding jointly-titled property is to be postponed beyond the expected time of divorce, it may be important to include appropriate protection regarding judgments or other liens on the property.

As to respective shares of the net proceeds realized from sale of the property, or in effect realized upon buy-out by one of the spouses, first, probably more than with respect to any other type of property, 50-50 division of jointly-titled real estate should be considered at least the basic starting point -- even if sale or realization of equity share is postponed for months or years after separation. In the latter connection, it should be noted that, in partition proceedings, at least after entry of the divorce Decree, the spouse who paid the mortgage ("Deed of Trust note") installments after separation does have a right to reimbursement from the other spouse for his or one-half share of the same; but, where that spouse was also allowed to reside in the property, the nonresident spouse has a usually-nearly -countervailing right of reimbursement for one-half of the "fair rental value" of the property during the period of his or her absence from the property. (22) And, even where this amount is less than the mortgage payment, adding the value of being solely allowed to claim the income-tax deductions attributable to the mortgage payments usually at least offsets the right to reimbursement for one-half of the amount of the mortgage payments.

Where it is the "absent" spouse who is making the mortgage payments, sometimes that is agreed at least primarily in lieu of "support" payments; hence, 50-50 division of the subsequent increase in value of property still, probably, would be appropriate. And, in the case of rental property, usually the spouse who undertakes responsibility for the debts regarding the property also is allowed to reap the income resulting from rental of the property.

Finally in connection with settlement of jointly-titled real estate, as to appropriate "buy-out" amounts, the usual costs involved in sale of the property should be "factored in"; i.e., at least or usually eight points (i.e., eight percent) "off the top," where residential property is involved -- 6 points for the realtor, I point for seller's payment of purchaser's loan points, and another point for other usual settlement costs. Often, requests for "factoring in" these costs are met with demurrers to the effect that, "but the property isn't going to be sold at this (that) time." But, if at least about eight points aren't taken "off the top" in figuring the buy-out amount, what will result is in effect a four point "rip-off" of the spouse acquiring the interests of the other in the property.

I.e., let us assume that we are dealing with jointly-titled property with an estimated fair market resale value of $200,000, encumbered (only) by a First Trust Note ("mortgage"), with a remaining balance of $100,000. If the property now were to be sold jointly, and the usual sales costs were involved (even if people sell "by owner," they usually lower the price somewhat, in effect themselves "factoring in" the real estate commissions they will be saving) -- before paying off the note, only $184,000 will be left ($200,000 x .08 = $16,000); and, if the net proceeds are equally divided, each of the spouses would receive one-half of $84,000 -- or $42,000. If we don't factor in the eight points, and the spouse who is bought out by the other receives one-half of the $100,000 difference between the $200,000 fair market value and the First Trust Note balance ($50,000), the "purchasing" party will be "ripped off," to the tune of the difference between $50,000 and $42,000 ($8,000, or four points) -- in the following manner.

At this time, each spouse has a one-half-interest in property with a gross value of $200,000 (i.e. each have a $100,000 gross interest, in effect). After buy-out, the note balance is solely the concern of the purchasing party. When that spouse does sell the property, say, 10 or 20 years later, for, let us say, $400,000, he or she will then have to pay (or deal with) these eight points which were not factored in the time of buy-out -- on the entire $400,000 sales price -- including the $100,000 gross interest for which he or she paid in full at the time of buy-out; at that time forcing him or her to pay an extra $8,000.00 out of his or her pocket (i.e., in our example, if the selling party realized $50,000 out of the buy-out, the purchasing party would have realized only $34,000).

Unfortunately, Fall 1997 and Spring 2000 Fairfax County Circuit Court decisions have, for the time being at least, really bollixed up this matter. In the 1997 case, the Judge relied on law treatise citations of cases from other states which primarily found sales costs "too speculative, " where sale was not imminent; and allowed a deduction only for projected refinance costs (which the other side stipulated to approximate three percent of fair market value). And, in the year 2000 case, another Fairfax Judge allowed no deduction whatsoever for future sales costs.

Consequently, it appears that, at least in Fairfax at this time, if the party to be bought out wants to "hang tough" and go to trial, he or she can get what probably amounts to a "bonanza," amounting up to four percent of the present fair market value of the property.

(22)A 1992 Court of Appeals decision held that this principle was not applicable to the pre-divorce period, where the property is held in the usual marital form, "tenancy by the entireties. " These principles could, theoretically, be applicable to the pre-divorce period where the couple owns real estate as "tenants-in-common" or as mere "joint tenants.

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