The division of property is a major issue in grey divorce, and for most couples over the age of 50 their house is the largest asset they own. Traditionally, for the majority of homeowners, the value of their home is two-thirds of their total assets. And the latest figures from the Census Bureau show that 76% of people age 50 to 59 and 80% of those aged 60 to 69 are homeowners-with well over 80% of all homeowners being married couples. Such statistics show that, even in today’s economic climate, the majority of couples in grey divorce are homeowners, and determining who gets the house is a major issue.
In the current economic climate of depressed real estate values, the breadwinner may find it a good idea to keep the real estate investments including the family residence (and the tax benefits) as part of the divorce settlement because the real estate is purchased in the divorce at the current fair market value and it is the breadwinner who is most likely able to afford keeping the property. However, making the decision to keep property in the divorce must be looked at in the context of how the asset affects support obligations and the cash flow available to meet them. Conversely, the non-breadwinner and typically the stay-at-home spouse, faces a tough choice on whether or not to keep the family residence because it is often questionable if this is a good financial decision for the non-breadwinner. Keeping the real estate requires paying current obligations (mortgage, taxes, insurance, monthly maintenance), future repairs and, any future capital gains tax and the costs of sale. Capital gain taxes and the costs of sale are not owed until the sale of the home, but these items are often very expensive consequences of the decision to keep real estate in the divorce. Therefore, keeping any real estate including the family residence as part of a divorce settlement is a business decision, not an emotional one. This article focuses on the issues surrounding the family residence, as opposed to investment real estate, because typically people own family residences but not necessarily investment real estate.
In and Out Spouse
As the result of the property division, if the house is not sold, then one spouse keeps the house. The spouse keeping the family residence is often referred to as the “in spouse.” The spouse who is bought out (i.e., paid for one-half of the net equity) is often referred to as the “out spouse”. After the divorce is finalized, and the finances relating to the division of the house has been finalized, it is not uncommon for the “out spouse” to be removed from the deed, yet remain liable for the mortgage obligation on the house. The reason for this is because the only way for the “out spouse” to be removed from the mortgage obligation is for the “in spouse” to refinance the mortgage into his or her name alone. If the “in spouse” is the non-breadwinner, a refinance can prove to be difficult due to the “in spouse’s” lack of income, especially in a difficult economic climate. The questions that then arise are (1) Can an equal division of property occur when the “out spouse” remains liable for the mortgage? (2) Will the “out spouse’s” credit be affected? (3) Do the risks outweigh the benefits of the “in spouse” keeping the residence?
As part of the property division, the “out spouse” should argue that being left potentially liable for the mortgage without ownership in the house is not an equal division of the residence. If the judge agrees, then the “out spouse” may be successful in getting an order for the house to be refinanced or sold, either of which will remove the “out spouse” from the mortgage. Being removed from the mortgage obligation will also improve the ability of the “out spouse” to purchase a home in the future, because a lender is otherwise unlikely to make, in essence, a second mortgage loan to the “out spouse.” The “out spouse” should request a “refinance or sale” order even if the case is settled without the help of a judge.
The “in spouse”, on the other hand, may resist a sale or refinance, by arguing that the legal requirement for an equal division has been met because the “in spouse” has assumed the responsibility for the mortgage in the property settlement (or court-ordered division of assets and liabilities). The logic of this argument is that there is no need to be concerned about the “out spouse’s” credit score, potential financial liability or potential future inability to purchase a home, so long as the “in spouse” maintains the payments as required by the bank or lender.
Credit Score Impact
The credit score of the “out spouse” can usually be protected from destruction if the “in spouse” defaults on the mortgage. This can be accomplished by a “fire sale” in the event the &in spouse” defaults on the mortgage. An example of this is that if the “in spouse” is delinquent in payments (i.e., two consecutive payments), then the residence shall be sold at the very best price which will cause an immediate sale (i.e., a “fire sale”). The “out spouse” should insist on receiving any notices of default directly from the “in spouse” as well as from the bank or lender. The greater problem is the “out spouse’s” emotional worry that the “in spouse” might default and/or that the credit liability of the old mortgage will likely prevent getting a loan for a new home. There is no solution to this emotional reality.
Risks vs. Benefits
The financial risks of keeping the family residence are relatively quantifiable. The “in spouse” needs to be sure he or she can afford not only the current expenses associated with the residence, but also the future expenses such as repairs, adjustments to the mortgage payment and any future capital gains tax and the costs of sale if the residence is later sold. While the expense figures are quantifiable, the unknown is the “in spouse’s” future income if the “in spouse” is the non-breadwinner. In grey divorce, as discussed above, aging affects income such as one’s ability to be competitive in the workforce and health issues which will likely arise and could impact the ability to maintain the residence. The expense consideration must be balanced against the tax benefits of owning the residence; the cost to replace housing if the residence is sold; the lost opportunity to invest the funds which would result from the sale of the residence which could be used to create a stream of income (i.e., dividend and interest income); and the emotional desire to remain in the residence. These risks and benefits must be weighted with the assistance of a divorce attorney and a financial advisor or accountant.
Marlo Van Oorschot is a respected Los Angeles-based family law attorney who for nearly 20 years has focused her practice on resolving divorce, child custody, child and spousal support and property disputes. She is the founding and managing partner of Law Offices of Marlo Van Oorschot, APLC. This article has been adapted with permission from: How to Survive Grey Divorce: What You Need to Know About Divorce After 50.