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Who Gets the House? Real Estate and Family Law

By Jon Hedgepeth, Hedgepeth, Heredia & Rieder

When a couple divorces, very often one of the largest single assets is the family home, which is often titled in both names and jointly mortgaged or secured. Since it is impractical to divide a house physically, that issue must be dealt with in other ways.

Selling The House
The most straightforward solution to dividing marital real estate is to sell it and thus convert it to cash, which can be divided equitably. Many couples find this solution satisfactory, but there are still details to be worked out.

When a divorcing couple are selling a house, there are certain parameters that need to be set:

  • Who is responsible for choosing a real estate agent?
  • Does the other partner get a chance to choose a different agent if the house doesn't sell within a designated time?
  • What are the guidelines and responsibilities for getting the house ready to sell?
  • If the house doesn't sell within a certain time, will the price be lowered, and by how much?

 Read more in this article from the Daily Report: http://at.law.com/Mz2NLy!

All these issues are important, and they all need to handled outside any settlement agreement or order. That's because it is easy for any potential buyer to go look up the title, see who the sellers are, and see if they are in divorce proceedings. Then, because divorce agreements are public record, the potential buyer can go in and pull the agreement and see that, for example, on a certain date the price must drop by some amount or percentage. That is clearly not in the best interest of either of the sellers.

 

What we recommend instead is a side agreement. It is essentially the same as a settlement agreement but it is not filed with the court and is not a public record. Instead, the side agreement is merely referenced in the settlement agreement. It is just as enforceable and ultimately may be filed with the court in the event either party needs to enforce it. However, it keeps private details of a real estate transaction out of the public eye.


Keeping The House
In some cases, one partner may want to stay in the house following a divorce. For example, in the case of parents with school-age children, one partner may want to keep living in the house for the purpose of staying in the same school district. The simplest solution is for the resident homeowner to buy out the non-resident homeowner's share, but these situations are often not simple.

The resident partner may not be able to afford to stay in the home on his or her own, and he or she may ask the non-resident partner for assistance in remaining in the house for a limited time, such as until the child moves on from that school. Sometimes alimony can be paid directly to the mortgage lender, so at least the payer is getting a tax deduction for it. There are some issues involved with getting a mortgage paid and taken as alimony (sometimes all of the mortgage interest deduction cannot be claimed). In these cases, the issues of refinancing comes up.

The non-resident partner may be reluctant to be responsible for a house he or she doesn't live in, because credit may be affected, and getting a loan can be difficult with his or her name on the mortgage, which shows up in a credit report as an ongoing obligation. And, even though the market is getting firmer, the lending is still tight and complicated any time you refinance.

Very often there will be equity lines or other liens and encumbrances on the house, and those must be paid off first, which diminishes the equity. Younger couples are less likely to have alimony as an issue, because length of marriage is a factor in determining alimony. Even with someone who is determined not to pay alimony, once they examine the tax consequences/liability of it, they may realize that it makes sense to stay on the mortgage for a limited period of time until the other person can sell the house or get the children to a certain milestone before moving on.

Bankruptcy
Years ago, after the real estate market crashed, couples in divorces were often basically fighting over debt. There were many houses that were financially underwater, so at that point, bankruptcy was a legitimate scenario. It's less common today.

If the parties want to declare bankruptcy so they can be absolved of the debt, the issue of short sales will still come up as a 1099 tax event, which is essentially imputed income, if the house is sold for less than the value of the loan on the house. After all, the lender may take back the house and sell it. Any shortfall may be imputed as income to the former owner. That is an issue a lot of people did not contemplate when drafting their settlement agreements- that there will be a tax liability down the road if the house sold "short" or if it is foreclosed upon.

Regardless of which path a couple takes, answering the question of "So what do we do with the house?" is a necessary part of many divorce negotiations. Taking a close look at the needs and finances of all parties can help everyone arrive at a workable solution.