Best Place Real Estate

I met an income tax specialist at a recent networking event. We discussed real estate and divorce and taxes. Later in the day I received an email from him that I copied and pasted below. It just goes to show the importance of consulting qualified professionals during the divorce process.

Hi Marion,
As we left breakfast, I realized I did not mention one of the most important tax issues for couples pre-divorce.
If they plan to file taxes separately, they may be advised that they must file “Married filing separately.” This is the most penalized way to file. If they have been living separately for the last six months of the tax year including December 31, there are better alternatives. I have a Chamber member in this situation and her CPA, who she had been using for many years, told her she must file “Married filling separately.” I had to PROVE to the CPA that that was not the case. She saved over $1,000 in taxes. She is now my client and I can give you her reference if you wish.
If I can assist you, I would be most pleased to do so.
Phil

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TaxXpert@cox.net
Direct: 949.241.6598
Fax:949.951.9491
It’s not how much you get —
it’s how much you get to keep.

Common divorce scenarios:

• A couple is going through a divorce. One spouse wants to keep the house and agrees to make the payments. The other spouse wants to rid himself or herself of the house all together.

or

• Due to the recent decline in the market, the house has lost value and there is little or no equity. Even worse, the house may be worth less than the loan balance. One spouse wants to sell the house even if they have to do a short sale. The other wants to keep it until the market turns around.

So the “out spouse” says, “OK, if you want to keep the house, I will quitclaim title and then it will be all your responsibility. I will not have to deal with it any longer.

Seems like a simple solution, but there is a major problem with it if both husband and wife are on title and both are on the loan. While you may be able to quitclaim title (take your name off the Grant Deed), you can not arbitrarily take your name off the loan (Deed of Trust). Anyone on the loan is individually 100% responsible for the loan. If you quitclaim title but remain on the loan, you are then responsible for a loan on a property in which you no longer have any interest. Not a good thing.

Even if it is agreed that your spouse will make the payments, you are at risk. If for some reason your ex is late or behind on the payments, your credit score will suffer. In addition, the loan will be included in your debt to income ratio which could impact your ability to purchase another home in the future.

Laurel Starks does an excellent job of explaining this issue in her article Divorce & Your House: Leaving your ex-spouse in control of the house….and what else?

I think the main point here is the importance of making informed decisions during the divorce process so you can move on with peace of mind after it is settled.

Many divorce specialists say that it is “never” a good idea for one spouse to keep the marital house. I disagree. As they say, “you should never say never”. While in many cases, it is best to sell the house when you get a divorce, sometimes it actually make sense for one spouse to keep the house.

I think what we would all agree on is that if you keep the house, know what you are doing. Make an informed decision. Too often the decision to keep the house is an emotional decision and this is the root of a lot of problems that occur after the divorce.

As real estate professionals representing buyers, we guide buyers through the due diligence necessary when purchasing a property. We advise all buyers to get property inspections, termite inspections, insurance reports, etc. However, when one spouse keeps the house in a divorce settlement, this process is rarely done. The result is that the spouse keeping the house is getting less protection than someone buying the house. It is important to note that just because you live in the house does not mean that you know what you are getting.

For instance, even though you live in the house, it is still very wise to get an home inspection. We all get accustomed to little quirks in our homes, but some of these things may need to be repaired in the near future. Are these costly repairs? What about termites? And how long are the appliances likely to last? While it is impossible for an inspector to guarantee nothing will break, a home inspection will give you a very good idea about the condition of the house.

It is also important to consult a loan officer during the divorce process. Are both spouses on the loan? If the spouse keeping the house agrees to individually refinance the house, can that spouse qualify for a loan?

There are other areas in which you need to be knowledgeable, such as title and tax issues. The point is that if you want to keep the house, it is imperative that you put your emotions aside and actually treat the house as a business transaction. A real estate divorce specialist can help you with this process and assist you with your property due diligence. Then you can make an informed decision that you will be able to live with after the divorce is settled.

Going through a divorce is a very tough and emotional experience. Decisions regarding your house are part of this emotional upheaval. Typically your equity is calculated using appraised value less the outstanding loan balance. However, if one spouse decides to keep the house, appraisal minus mortgage does not equal equity. I have heard horror stories of damaged credit, default, foreclosure, and bankruptcy after the divorce that resulted from decisions made regarding the marital house.Many of these problems could have been prevented during the divorce, but can’t be fixed after the divorce. Even though the family home is often a couple’s most valuable asset, many divorcing couples are not doing their due diligence when it comes to determining its value. They are overlooking factors that can cause serious problems for both spouses after the divorce.

I recently completed the course work to earn the RCS-D designation as a Real Estate Collaborative Specialist - Divorce. My intention is to assist couples during the divorce process with the necessary due diligence regarding their house. They will then be able to make an informed decision and avoid problems that could haunt them for years after the divorce.