Since I’m clearly not an attorney or a CPA, my blogs are focused on the sale of your home. However, in this blog, I hope to direct you to some of the concerns you may need to discuss with your attorney or financial/tax professional.
While going through a divorce, amicable or not, most couples may be presented with some unexpected financial decisions.
Divorcing couples need to be aware of these potential issues before, during or after the divorce goes to court. Just being aware of the potential financial issues is helpful to a divorcing homeowner.
- First and most important, creating a feasible financial plan for after the divorce without your spouse’s income. If you are the spouse that initiated the divorce you may already have a plan. If the divorce is coming to you as a shock, you may need to put your emotions aside for a minute and seek some financial planning advice. If you are angry and resentful your plan maybe to hurt your spouse in anyway that’s available to you. That being said, you may need to think about the business of your life and not the emotional demands of your heart right now.
- Since the primary residence may be your largest asset, and possibly your largest liability a decision needs to be made on whether or not to keep this home. I discuss this at length in many of my blogs and in my books. This is a complicated decision and I would not do it justice if I tried to reduce this discussion to a single paragraph. To really consider this issue, please either read some more of my blogs, read one of my books, seek council from your local divorce experienced Realtor, or contact me directly.
- Equity position, knowing your equity position can point you to the correct business decision on the disposition of your primary home.
- Taxes, knowing the tax benefits and consequences can also help you determine if keeping your home or selling it might be the best option for you and your spouse. Two of the most important tax issues to consider are Capital Gains and or Prop 60/90.
- If you are thinking right now that you want to keep your home, you want to get council to determine if that’s the best decision for you. There are a few options to consider:
- If you used 2 incomes to qualify to purchase your home, will you qualify for a loan based on your after-divorce income? You may want to talk with a mortgage lender to explore your options whether you keep the home or to qualify for replacement home. Just make sure that keeping your home is a good business decision and not an emotional one. You don’t want to financial cripple yourself holding onto something for emotional reasons.
- If you currently have a mortgage on your home you may want to contact your current mortgage holder to discuss a loan modification. The 3 Ds (Death, Divorce, or Disability) are usually qualifying hardships for a loan modification.
- If you are in a negative equity position and you don’t want to do a short sale, then perhaps you can rent out your home until the equity position improve. Personally, I only hold this out as an option because it does exist. However, I would not recommend this option to any of my clients because it keeps you financially and emotionally attached to your ex. This may prevent you from moving on and discovering and creating a better life for yourself.
- If you have a positive equity position, and you want to keep the home, this too is too complicated to reduce to a single paragraph. I would strongly recommend that you discuss all the different tax consequences with your trusted financial/tax consult. As an example, Capital Gains. As a married couple, you may have a $500,000 tax exemption on the proceeds, but if you keep the home now, and sell it as a single person after the divorce you may only have a $250,000 exemption.
- If it is determined that selling your home would be the best option for the both of you, some of the financial issues you should consider are:
- Would renting a replacement home be the best choice immediately after a divorce? It gives you some freedom to determine where you want to be without tying you down. However, there are tax considerations you may want to discuss with your advisors.
- If locational freedom is not a concern, then purchasing a replacement property will take some planning with your after-divorce resources. You may want to get a lender and a Realtor involved early in the process.
- Protect your credit! As quickly as possible pay off and close joint accounts. You will notice I say, “as quickly as possible” in some states you may not close joint accounts without permission from the courts. Even if the court orders your spouse to be responsible for certain joint debt, they may make late payments or miss payments which will have a direct effect on your credit. Discuss your credit protections with your legal counsel.
- If you are over 55 Prop 60/90 allows you to transfer your tax liability from your current home to your replacement property as long as you are downsizing. However, only 1 of you can take this tax benefit. Example: If you and your spouse bought your home for $100,000 and now it’s worth $600,000. You buy a replacement property for $595,000. First, because the replacement property is valued under the sale price of your current property, it is considered downsizing. Second, because the equity in your sale is $500,000 it may qualify for a capital gains exemption. Third if you exercise Prop 60/90 you may pay property tax based on $100,000 instead of your new purchase price of $595,000. In Los Angeles county, where I live, it could be an annual saving of over $6,000. Considering that only one of you can take this exemption you may want to:
- Negotiate that you can take the exemption
- If your spouse negotiates they get the exemption, then put a time lime on their ability to use it. The benefit must be used within 2 years of the sale of your current residence. Therefore, put a 1-year limit, so if they don’t use it after one year you can.
- Don’t negotiate it and just be the first one to apply for it. Obviously, this is a riskier position to be in, but if negotiations are not possible it may be an option for you.
Really there is so many considerations it would be impossible for me to address them all here, if you have something specific you want to run by me, just contact me directly.