Thursday, September 18, 2014

Who Gets the House?

If you are going through a divorce and own a home, chances are you are trying to decide what to do with the house.  Should you keep it, sell it, or let your spouse have it?  There are several things to think about when making this decision which can have immediate, as well as long-term, effects.

In Oregon, the allocation of property between spouses in a divorce must be “just and proper.”  ORS 107.105(1)(f).  In general, this means that an asset acquired during the marriage should be divided equally between the spouses.  Assuming your home was purchased during the marriage, this means both you and your spouse will receive one-half of the equity value in the home (the current market value minus and outstanding mortgage or other indebtedness secured by the house).  If you keep the home, you will owe your spouse his or her one-half share of the equity through a cash pay-out (sometimes obtained through a refinance) or through an award of other assets.  If your spouse keeps the home, he or she will owe you 50% of the equity, either in cash or through other assets.  And if neither of you keep the home, the home will be sold, with the net proceeds typically being divided equally between spouses, depending on the allocation of other assets and debts.

In determining what to do with the home, you should explore the following:
  1. Do you know what your house is worth in the current market?  You should get a comparative market analysis or appraisal done of your home to determine its likely current market value.  If you owe more than the house is worth, can you afford to pay the shortfall or will you need to explore a foreclosure or short sale?  Meet with a real estate agent to learn how long houses like yours are taking to sell in your area so you can think about how the mortgage, utilities, insurance, etc. will get paid while the sale is pending.  The real estate agent should also be able to give you an idea of how much you should you budget for necessary repairs to make the home marketable.
 
  1. What type of living situation do you really need?  If you have children and need multiple bedrooms or bathrooms, explore the cost and availability of rentals in your area.  It might make more sense to rent versus being financially tied to a non-liquid asset while you figure out what your needs will be after the divorce.  Renting may make sense given the needs of your post-divorce life-style.  For example, if you are now going to be a single parent, do you want to be responsible for household repairs and maintenance or would you prefer being able to contact the property manager to have those tasks done?
 
  1. Can you really afford the home?  In addition to discussing this with your divorce lawyer, meet with a financial advisor who can help you review your monthly budget.  Explore not only the cost of the monthly mortgage, but also the cost of maintenance, utilities, property taxes, etc. in determining whether you can afford to keep the home.  You also may need to determine whether you can qualify to refinance the mortgage into your own name. Typically the other spouse will not agree to remain on the loan indefinitely and the court can order the sale of the home if you are unable to refinance as a way of removing your former spouses name from the loan obligation.
 
  1. What assets are you giving up in order to keep the house?  The goal is to make sure the liquidity of the assets you are get from the divorce match your needs.  Again, meet with a financial advisor and/or CPA to determine the various tax consequences that could result from selling or trading assets and liabilities during divorce.  For example, if you decide to keep the house now and intend to sell it later on your own, you may have to pay significant capital gains tax and real estate fees while selling during a divorce essentially splits these costs with your spouse.  If you’re giving up a pension or other retirement asset to keep the house, you should understand the long-term consequences (i.e. pre-tax contributions and tax liabilities) before doing so.
 
  1. Is there a benefit to getting rid of the home and moving on?  If you shared this home with your soon-to-be ex-spouse, there might be emotional and financial benefits to selling the home.  It might be a financial benefit not to be tied to a non-liquid asset and to receive cash and/or retirement assets instead.  It might be an emotional benefit not to be reminded of your past every time you sit down in your kitchen or living room.  There is typically an emotional cost you should try to account for when making these types of decisions in your divorce.

Regardless of what you do, try to have as much information as possible before making any final decision.  Given the long-term ramifications of these types of decisions you want to make sure you have the right experts involved.  Ideally, you will want to explore your options with your divorce attorney, financial advisor, and/or accountant in order to make well-informed and educated choices regarding your property division.

Written by Paige A. De Muniz, Shareholder.