Real Property Equitable Distribution in a Divorce
Looking to the numbers for the answer
This post considers an issue that frequently comes up in divorces, i.e., what to do with real property such as the family home, timeshares, vacation properties, and investment properties. Typically, the options are to hold, sell, divide or share the real property, or some combination of these options.
Many times, the numbers provide the answer.
Here’s a list of the numbers that may be relevant:
- Purchase price of real property
- Loan balance and payment
- Annual cost of occupying the real property
- Tax basis in the real property
- Expected sales price of real property (net of transaction and sale related costs, including Federal and state income taxes)
- Annual net income from renting the real property
- Cash flow of each party post-separation/post-divorce
If this information for each property can be summarized side-by-side on a spreadsheet, the evaluation of the financial consequences of each possible option is relatively straight-forward.
Nonfinancial reasons for keeping real property
More difficult is deciding what to do when there is a non-financial reason to keep a property. For example, couples might choose to keep the family home to provide stability for their children and allow them to finish high school in the same school district. If keeping the family home for some number of years is a priority and money is tight, parties may need to structure creative living arrangements such as continuing to live in the same home but “separate and apart” or taking turns living in the family home with the children. While these arrangements present challenges, they may provide benefits that outweigh the challenges.
Some questions to ask
Here are a few questions parties might think about and discuss as they make a decision with respect to property:
- If property is sold today, how would you expect to split the net proceeds?
- If money isn’t an issue, what is the desired disposition of each property?
- If you contemplate a deferred sale, who will occupy the property until it is sold and what is the desired financial arrangement?
- If the property is listed for sale today, are there any costs you would expect to incur to prepare the property for sale?
- Do you have a real estate agent you would use and have you discussed a possible sale with that real estate agent?
- If one of the parties intends to occupy one or more of the properties before sale, how should costs be divided? Some options include: equally, some costs equally and others to the occupant, by income, all to the occupant, etc.
- If one of the parties intends to occupy one or more of the properties, should rent be charged and, if so, how much?
- Are there benefits to having one of the parties occupy the property until sale that should be reflected in the financial arrangement for the occupancy?
- What happens if only one of the parties can afford to pay the cost to maintain the property and a sale isn’t feasible?
- Is there enough cash flow to carry all or some of the properties?
- Would any tax be due on the sale of any of the properties? If so, how is that tax liability to be split?
- Are any of the properties underwater, i.e., mortgage exceeds expected net sales proceeds? If so, how will the payment to the mortgage company on the sale be divided?
- If one party takes one or more properties as part of the property settlement, will that party qualify to refinance the mortgage?
Mediation can help find a solution
My own experience is that most couples sell all property that has a reasonable market and downsize in new homes that are more manageable from an upkeep and financial perspective. Nevertheless, I believe mediation is a good platform for discussing all of the considerations, emotional and financial, so that both parties can feel comfortable that they have rationally considered the options and are making a well-reasoned decision.