Husband and Wife own a home and are now considering what to do with it at the time of the divorce. They had spoken with an attorney and came to mediation with a proposal:
Wife will keep the home and Husband will transfer title into her name alone now. Then in 4 years, when the children graduated high school, it would be sold. Husband would get part of the buyout now and part of it when the house sold. They were working on deciding the buyout amount and payment over time in mediation.
This is what we commonly see come our way from other family law professionals and clients. In this instance, we have the basics covered:
1. Who is keeping the home?
2. What will the buyout be?
3. When will title be transferred?
4. When will the buyout be paid?
The predicament is that there a vast number of red flags that we find in a proposal such as this, which are very dependent on each couple’s situation. This is not one size fits all – we need to get into the details. In mediation, we helped the couple identify:
1. Title versus Mortgage. A common mistake we see is that an individual, or even family law professional, will recommend that is Wife is keeping the home, Husband simply needs to quit claim her the deed and then she has ownership. While this may work if there is no mortgage, it doesn’t work when a mortgage is present. First, transferring title into Wife’s name alone can accelerate her mortgage, making it all due and owing now. Second, this leaves substantial liability for Husband. Husband is liable for the loan, but no longer has ownership in the house. So, it leaves them both open to substantial risk. Alternatively, we discuss refinance and assumption options with our clients.
2. Taxes. When the buyout for a home is considered, generally a family law professional looks at the fair market value of the home, minus any loans such as mortgages or HELOCs. But what about the taxes? Capital gains taxes can have a drastic impact on the ultimate value of a home upon a sale, particularly since a married couple usually avoids taxes on up to $500,000 of gain and a single person avoid taxes on up to $250,000 of gain (with tax exceptions – it’s important to understand your unique tax implications). In this instance, if the couple sold their home while owning it jointly, they wouldn’t have any tax implications – each individual covered for $250,000 of gain. If they transferred the home into Wife’s name alone, they would have a loss of an estimate of $60,000 in taxes. This is a drastic difference when considering the value of the home upon sale, in only a few years.
3. Future Buyout. Whether the couple continued to retain the property jointly for tax purposes, or Wife took over the home and paid Husband in the future, there is a concern about securing this agreement. What if something were to happen in the future before the agreement could be completed. Some examples include:
Wife passes away before Husband receives payment
Husband passes away before receiving payment
Either partner passes away while they continue to own the home jointly
Mortgage payments are missed while both partners remain on the mortgage together
These issues need to be resolved with different forms of “security” i.e. agreements on what happen in these instances. Some examples include: life insurance to secure the amount due from Wife to Husband, titling the property to provide them both protected interest, establish estate plans, requiring expeditious sale upon missed payment, and more. We have to consider the possibilities and account for them as best we can with what we can anticipate.
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