There can be some very good reasons to keep the marital home after your divorce. For instance, you might want to allow your kids to finish their schooling in that area. Or providing stability for the family. But figuring out the logistics can be complicated. Last month, in Can I Keep the House? published on this website, we explored the concept of one spouse purchasing the other’s interest in the home. But face it, the funds might just not be there.
So this month we will look at what it might look like for you and your spouse to continue to own the house together after the divorce.
Here are some suggestions for considerations that you might incorporate into your discussions and into your agreement for clarification and to avoid issues arising later:
1. Lack of Financial Separation: The most important thing to consider is that continued co-ownership of the home will keep you financially intertwined. This may be good or bad, advantageous or not, depending on your situation and you and your ex’s attitudes toward money. But it is certainly something to be aware of.
2. Equity: The agreement should also state some of the facts – when the house was purchased, who made contributions to the down payment and how much those contributions were, who has been making mortgage payments, whether there have been any renovations done and how those were paid for (out of marital or separate funds), the current fair market value (or agreed upon value) of the home, and the amount of equity in the home.
3. The Deed: Whose name is on the deed to your home? Is it only in the name of the spouse who will reside there? Or is it in the name of the non-resident spouse (NRS)? Or joint ownership? Note that, in many states, joint ownership of a married couple automatically confers rights of survivorship – that is, if one spouse owner dies, the other spouse automatically owns the house 100%. But when you divorce, continued joint ownership may automatically convert to Tenants in Common – each owning 50% of the house. This means that you can each leave your half of the house to another person. You can address this issue in the estate provisions in your agreement. You may not want to end up owning the house with your ex’s new wife!
4. The Mortgage: Because lenders look at the ratio of debt to income, it may be more difficult – or impossible – for the non-resident spouse to purchase another home while still having his/her name on the mortgage for this home. If the real estate market is going up, this means that the NRS will lose out on any potential benefits of home ownership, and will not begin to start establishing equity for several years.
5. Defaults: If the NRS is paying the mortgage, the resident-spouse may be vulnerable if the NRS pays late, or defaults. Therefore, you should both have access to the mortgage statements, and should know exactly what is going on at all times. You should also have a system in place for what happens if the spouse who is supposed to be paying cannot do so in a timely fashion.
6. Capital Gains Exemption: If the house continues to be co-owned, the resident spouse may claim a $250,000 exclusion from capital gains taxes that the non-resident spouse cannot. So your agreement should mention how this benefit will be shared.
7. Tax Advantages: Mortgage interest and real estate taxes are tax-deductible. Make sure your agreement addresses who will claim these deductions and whether or not such interest counts as alimony.
8. Estates: What happens if one spouse passes away while the house is still co-owned? Do you need life insurance to make sure that mortgage payments can still be made?
9. Time of Sale: If the home will continue to be co-owned, the agreement should be very clear on when the residential spouse will move out and when the home will be put up for sale. It might mention whether the NRS has the right of first refusal – the right to purchase the home before it goes on the market.
10. Protocol for Sale: If the home will continue to be co-owned, the agreement should also be clear about the protocol for putting the house up for sale – how a broker will be chosen, how an asking price will be determined, what happens if there are no bids for the asking price, who will be responsible for closing costs, and how the proceeds will ultimately be divided.
11. Co-Operative Apartments: If you live in a co-operative apartment, it is important to find out whether the coop board allows the non-titled spouse to live there after the divorce. Will the co-op board consider the arrangement a sublet or treat the non-titled spouse as a shareholder? Be sure your attorney reviews the proprietary lease and contacts the co-op board or managing agent before you sign the agreement concerning this issue.
12. Consideration: In some ways the non-residential spouse is making a loan to the residential spouse by allowing the RS to continue to live there, particularly if the NRS has made a large down payment. How will the NRS be compensated to tying up his/her equity? For some NRS’s the mere anticipated equity may be enough. Others may wish simple or compound interest.
This list is by no means exhaustive – every situation is different. While the idea that one spouse should stay in the house is simple, the reality can be quite detailed and require a lot of thought. Careful planning and drafting early on can save a lot of time, money and angst later. Speak to your lawyer and financial advisor about your specific situation to help you tailor an agreement that will work for your family.