By: Joe and Cheryl Dillon
Jennifer Lopez and Ben Affleck have further fuelled rumours they are headed towards an imminent divorce following reports that their Beverly Hills mansion has been publicly listed on the property market for the huge sum of $68 million (approximately R1.2 billion).
We decided to answer some of the most frequently asked questions that those going through a separation may want answers to on the division of jointly owned property.
Property division following a divorce
In my experience working with divorcing couples, the family home is often the most significant asset. As a result, discussions about dividing this property during divorce proceedings can be both intricate and emotionally charged. For couples grappling with this issue, I’ve compiled answers to the seven questions I’m frequently asked when guiding clients through negotiations regarding their marital home.
Understanding these common concerns can help you navigate this challenging aspect of divorce more effectively. Whether you’re considering selling the home, buying out your ex-spouse, or exploring other options, having clear information about the process can ease some of the stress and uncertainty.
Every divorce situation is unique, and what works for one couple may not be the best solution for another. However, by addressing these common questions, you can gain a better understanding of the options available and the factors to consider when making decisions about a marital home.
1. Who gets to keep the house in a divorce with children?
A common misconception regarding divorce proceedings involving children is that the primary caregiver automatically retains ownership of the family home.
This belief stems from the notion that maintaining a familiar environment for children is paramount. However, this assumption oversimplifies the complex nature of property division in divorce.
While some couples may opt for such an arrangement to minimise disruption to their children’s lives, it is not a mandate or universal practice. Rather, the decision of who keeps the house emerges from a negotiation between a mediator (or each party’s respective legal counsel) and the unique circumstances of the divorcing couple.
2. Can we sell the house and split the proceeds?
Selling the family home and dividing the proceeds can be a good option for some divorcing couples. However, contrary to popular belief, there’s no requirement to split the money evenly.
In the United States, divorcing couples can negotiate how they’ll share the money from the house sale. This process may result in an agreement where one person might receive a larger portion of the proceeds than the other.
The final division – in my experience – depends on what both parties consider fair, taking into account various aspects of their marriage and individual circumstances.
Factors that might influence this decision include each person’s financial contribution to the home, one party’s need for liquidity to purchase another home, or in exchange for offering the other party a larger share of a different marital asset.
3. How is the value of a house in a divorce determined?
Figuring out how much a property is worth during a divorce can be a tricky and sometimes tense process. The method used to value the home can make a big difference and might end up favouring one spouse over the other.
Couples often use different ways to figure out their home’s value.
They might hire a professional appraiser to give an expert opinion based on the current market and the home’s features. Sometimes, they ask a real estate agent to look at recent sales of similar homes in the area and estimate the value. Other couples might use websites that give rough estimates of home values, though these aren’t always accurate.
If the house was bought in recent years, they may use that purchase price as a starting point.
The choice of method often depends on what the couple plans to do with the house. For example, if one person wants to keep the house and take over the mortgage by themselves, they usually need a professional appraisal. In these cases, the value from the appraisal is often used to decide how to divide up the couple’s assets.
It’s important to remember that each way of valuing a house has its benefits and drawbacks. The method chosen can have a significant impact on both party’s finances, so it’s something that needs careful thought.
Sometimes, it might be helpful to get advice from experts to make sure the valuation is fair and accurate. The goal is to find a value that both parties can agree on and that helps them divide their property fairly.
4. What if one spouse wants to keep the house but can’t afford the mortgage alone?
When couples divorce and one person has been staying home to raise kids while the other has worked outside the home, it can be tough for the stay-at-home parent to keep the house.
If they can’t easily find a job that pays enough and the support they get from their ex isn’t enough to cover the costs, there are some creative solutions that I’ve seen couples use.
One idea is to rent out part of the house. The stay-at-home parent might rent a spare room or even a section of the house to someone else. This extra money can help pay the mortgage or other house expenses.
Another option is to change how alimony is paid. The working ex-spouse might agree to pay more alimony at the start, then gradually pay less over time. This gives the stay-at-home parent more money right away to help them afford the house until they can get back on their feet financially.
These are just a couple of ways I’ve seen couples solve this problem. There might be other solutions, depending on the couple’s specific situation. What works best really depends on each family’s unique circumstances and what both people can agree on.
It’s worth noting that every family is different, so what works for one might not work for another.
Sometimes, it can be helpful to talk to experts like financial advisors or divorce mediators who can help couples think of more options and find a solution that works for everyone, especially if there are kids involved.
5. How do we handle the mortgage if only one person’s name is on it?
In divorce proceedings where one party retains the marital home, the process is more straightforward if the resident spouse is also the signer on the mortgage.
However, complications arise when the individual keeping the house isn’t listed on the mortgage.
In such scenarios, a common arrangement involves the non-resident spouse remaining on the mortgage despite no longer inhabiting the property, while the resident spouse continues to occupy the home.
For this arrangement to be viable, the divorcing couple must reach an agreement on several critical issues and carefully document them in their divorce agreement.
These may include things like establishing a time frame for the non-resident spouse to remain on the mortgage, developing a contingency plan to address potential missed mortgage payments by the resident spouse, and setting a firm deadline by which the resident spouse must either refinance the mortgage solely in their name or sell the property.
It is important to recognise that should the resident spouse default on mortgage payments, the credit rating of the mortgage holder – even if they no longer reside in the home – could be negatively affected. This underscores the importance of clearly defined agreements and open communication between the divorcing parties to protect their financial futures.
6. How does refinancing work in a divorce situation?
Refinancing a house during a divorce is similar to refinancing at any other time.
The main difference is that you might need to buy out your ex-spouse’s share of the house. This often means taking out extra money when refinancing to pay an ex-spouse.
Before you agree to this in your divorce, it’s smart to talk to your bank or a mortgage expert. They can tell you if you can qualify for the amount you need to borrow. This is especially important if you need extra money to pay your ex-spouse for their share of the house.
Pay close attention to what your new monthly mortgage payment will be. Interest rates are much higher now than they were a few years ago. Plus, you might need to borrow extra to pay your ex-spouse. This could make your monthly payment much higher or it might be too expensive to stay in the house.
It’s better to know this before you start negotiating your divorce. That way, you won’t be disappointed or have to go back and change your plans later. Understanding your financial situation early on can help you make better decisions about the house.
7. Will I have to pay capital gains tax if we sell the house now or if I sell it later?
Dealing with taxes when selling a house during a divorce can be complicated. The tax rules are always changing, and they’re different for married and single people.
Because of this, it’s a good idea to work with a tax expert, like a CPA (Certified Public Accountant). To figure out if you’ll owe taxes when you sell your house, you need to know a few things:
First is the purchase price/cost basis; second, is how much you spent on big improvements to the house, so if you did any, hopefully, you kept the receipts; and third is how much you’re selling it for.
These details help determine if you made a profit (called a capital gain) that you might need to pay taxes on.
A tax expert can help you understand these rules and how they apply to your situation. They can also help you find ways to pay less in taxes if possible by reducing your gain.
It’s important to get this advice before you make final decisions about your house in the divorce. That way, you won’t be surprised by a big tax bill later.
* Joe and Cheryl Dillon are divorce mediators and relationship experts at Equitable Mediation.
PERSONAL FINANCE