Divorce and Real Estate

Divorce and Real Estate

When a marriage ends, one of the most contentious issues can be dividing up the assets—figuring out who gets what. If the spouses own real estate together, this is likely to be among the most valuable assets.

Although it can be hard to make rational decisions in an emotionally charged situation, it’s worth the effort. Making decisions out of anger or spite can be really expensive.

When divvying up ownership of the house, there are a few options. Couples can do nothing, maintaining joint ownership and putting off the disposition of the property indefinitely. Sometimes this happens when the couple plans to leave the property to their kids someday.

They can sell the property and divide the proceeds. Depending on the situation, this can be an expensive option. In a buyers’ market, when one spouse refuses to allow the other spouse to buy him or her out, a forced sale can lead to a financial loss. Even if the house has increased in value since it was purchased, there are still fees associated with the sale. If the couple has young children, a more important cost may be the emotional price the kids pay when they’re displaced from their home.

A better option for many couples is an inter-spousal transfer deed or a quitclaim deed. These allow one spouse to transfer title to the other without triggering a due-on-sale clause or a reassessment of property taxes.

While this is a good option for many, it’s important that both spouses consider the economic viability of only one person retaining ownership (and the expenses associated with home ownership) before going this route. Keep in mind, the spouse who gives up ownership remains on the loan documents. When the bank underwrote the loan, they assessed the risk based on both spouses: potentially, two incomes and the better of the two credit scores. So although the divorcing spouses may agree about who is taking on the mortgage payments in return for ownership of the property, if the spouse who receives the property defaults on the loan, the lender can come after the other spouse for compensation.

In case you’re wondering, an inter-spousal transfer deed occurs when one spouse transfers ownership to the other. A quitclaim deed is a legal document that says, in essence, “I transfer any interest I may have in this property.” Quitclaim deeds are often used to resolve disputes between neighbors. For example, if neighbors disagree about an easement involving their two properties, one neighbor can provide a quitclaim deed clarifying that he gives up any ownership of the disputed area. Interestingly, you can give someone a quitclaim deed on a property you don’t even own because there is no “title covenant” (requirement to prove you own an interest in the property).

These same transfer-of-title issues apply whether the property in question is the primary residence or income property. If the couple owns investment properties, they should consider whether both spouses have the economic capacity and business acumen to manage property. Typically, one spouse has been the investor and had tailored the properties that match his or her comfort level.

To divvy up investment properties, a portion could be sold to cash out one spouse, or other assets could be traded for equity in the property; or perhaps the non-acquiring spouse could receive a note secured by the property. When calculating who gets what, remember that the one who keeps the rental properties may have to pay legacy capital gains taxes.

As always, I highly recommend that before making any decisions like these, consult your accountant and/or attorney first.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.