One challenging aspect of divorce is the fact that numerous important practical decisions must be made while the parties are simultaneously working through difficult emotional changes.
Deciding what to do with jointly-held real estate is one such example. Many couples own a primary marital home, while others may also have vacation homes, investment/rental property, and/or work-related property. It is important to realize that there are different tax consequences for each property type. You should consult with a tax specialist before taking any specific action.
A Mediator or Collaborative Practitioner (CP) may be helpful in suggesting various real estate options to consider.
Refinancing or Paying Off a Mortgage
One or both spouses may be interested in refinancing a joint mortgage, or even paying it off. This may be a wise course of action if one person does not want to be legally responsible for the mortgage anymore, or if s/he is trying to purchase another home and does not want the mortgage debt to appear on his or her credit. If this route is taken, be aware that post-recession, many banks have made the refinancing process more difficult (though not impossible). Look for a bank that is more flexible.
Cash Buyout or Delayed Buyout
One party could use various assets to buy out the primary home from the other spouse. For example, one party might trade off $100,000 in equity from the family residence in exchange for other savings or investments. While this should be an equitable division, that does not necessarily mean a 50/50 division. Professionals can help determine what is equitable in your particular situation, and what adjustments (if any) in valuation should be made—for instance, to offset differing tax consequences. Consult with a tax professional to be sure you understand any tax implications of your actions.
A divorcing couple may also decide that one spouse will buy out the other over time, with an agreement that gradual payouts or a lump sum payment will be made at specific intervals. A Mediator or CP can help suggest creative options.
Selling a Marital Home
The parties may feel that it is in their best interest to sell the home and buy or rent two smaller homes. This could help ensure that children will feel comfortable at either parent’s place and make maintenance and/or finances more manageable. Think of this as a new beginning.
A vacation home may be converted into a primary residence for one of the divorcing spouses. There are special tax consequences involved in such an action, and a professional should be consulted before doing so.
Also, be aware that there can be significant sentimental attachment to a vacation property, especially with children. Many good memories were likely made there, and the children may be unhappy with your decision to sell. In this instance, it is important for parents to make a practical decision that is in the best interest of the family’s financial future, rather than catering only to the children’s desires.
Investment or Business Real Estate
Consideration should also be given to any additional property a couple may own jointly, such as investment or work-related property. While there may be less emotion attached to a rental property or office building, there are still many financial and logistical factors that must be addressed. Who will the caretaker be if you keep the property jointly? Are there business partners or other family members who should be involved in any decision? Does the property come from one spouse’s side of the family, and if so, is it considered marital property at this point in the marriage? Be sure to consult with a professional.
Emotional Impact of Real Estate Decisions
Be prepared for the emotional toll that real estate decisions take, primarily in the case of marital or vacation homes. One party may have a very difficult time processing the changes, while the other may want to move on as quickly as possible. If children are involved, the parents may feel guilty putting them through the pain of losing their home and leaving a good neighborhood when they are already going through so much. A family may have painted the home’s rooms and planted the gardens themselves, transforming the house over the years. Both good and bad memories will likely be associated with the home, often in a contradictory fashion. Babies may have been born there, but a marriage likely also fell apart there. Know that none of what you are feeling is wrong, but is in fact very normal.
It is important, however, to put these emotions aside and focus on financial considerations. You may love the house and want to keep it, but you must ask yourself if you can honestly afford it. Do you want to be house-poor, or sacrifice retirement assets, for the sake of holding onto a home? Will you be able to maintain the home on your own, or continue paying the mortgage or taxes on just a single income? Will you have time to rebuild your retirement, considering your age? Even if you can afford to do it, should you?
A CP or Mediator can bring in a coach and/or financial planner to help a couple answer such questions and look at the big picture. Rarely is a situation black and white. Professionals have the resources to help a couple work through their dilemma and come up with a solution to meet their needs.