A Guide To Understanding The Relevant Financial Issues
Before addressing whether to keep your house or sell it after divorcing in Florida, you need to understand the concept of equity.
Your home is an asset. The home is worth something. That something is the fair market value of the home. The market value is the likely selling price for the home between a willing buyer and seller on the open market. More specifically, what you would get for the home if someone bought it.
We usually get an appraisal on the home to determine its value. There are a couple of acceptable ways for an appraiser to determine value. The most popular is the market approach, or what comparable homes in the neighborhood sell for. Less common is to determine the replacement cost of the home and the land.
To get a quick estimate of the fair market value of your home, check out Zillow.com and/or the Home Value report online.
But the market value of the home is only half of the story. Most homes have corresponding liabilities like a mortgage or a home equity line of credit. These loans represent money that needs to be paid to a bank or other lender if you were to sell the home, before arriving at any net profit.
The difference between the market value of the home and the corresponding liens against the home is the equity. Determining home equity is an important first step in determining whether to keep your house or sell it after divorcing in Florida. The more equity in the home, the more options available to the parties involved.
TAX EFFECTS ON HOME (ESPECIALLY IF PURCHASED BEFORE 1997)
Sometimes we need to adjust the fair market value of the home to adjust for any tax effects on the home. This is especially true with homes that have been owned for quite some time. In 1997, tax laws changed to make it easier for people to sell their marital home without having to pay taxable gains. Prior to 1997, you would have to roll your house profits over into another residence to shield yourself from paying capital gains. After 1997, the law was changed so that, as long as you are not netting $250K on the home, you will not be paying capital gains.
So what if you and your spouse have either owned your home for 20 years, or it has increased in value by hundreds of thousands of dollars?
If you are going to sell the home after the divorce, this is not a problem. Both parties will split the taxes. But if one party is keeping the home, we don’t want a situation where the capital gains tax is not split fairly. If we don’t address the issue upfront, then the party who is keeping the home may be overpaying for the home in the divorce.
STILL NEED FAIR DIVISION WHATEVER THE SPLIT FROM THE DIVORCE
Regardless of the amount of equity in the home, we need to get a handle on what fair amount of equity each party should receive. The simple concept is that if the house is marital in nature all of the equity is subject to division.
If a portion of the equity in the home is marital in nature but a portion is also non-marital, then only the portion of the equity that is marital is subject to division.
If a home is entirely non-marital, then the home is entirely set aside and awarded to the non-marital owner of the home. If the entire home is non-marital, then we are really on top of figuring out how to handle the occupancy of the home in the short term. In the long run, we know that the owner of the home is going to keep the property.
Note, however, the situation where the home is entirely non-marital is quite rare. That’s because in almost any situation where there is a mortgage on a home that is paid in part from monies earned during the marriage by either party, then we are going to have at least some component of the home being marital. That’s because the marital property includes not only property bought during the marriage, but also a property that has appreciated in value during the marriage due to marital contributions.
To learn more about determining how much of a home is marital and how much is not, check out our equitable distribution page
HOUSE TITLED IN ONE SPOUSES’ NAME
If a house is titled solely in one spouse’s name it means the home was likely purchased during the marriage. This tells us a few things: First, the homeowner with the home titled in his name will almost always get to decide if he or she will keep the house or sell it. The court does not have the power to order a homeowner with the property titled only in his or her name to sell the property.
There is a small exception when kids are involved: In certain cases, the court can give use and possession of the home to the other spouse for a term of months or years as part of child support. This is a rare situation, however, and it’s best to chat with your attorney to determine whether this applies to your case.
Second, the home will probably have a non-marital component or value, that needs to be set aside. Now of course this does not mean that we are actually dividing the property and setting a piece aside. It just means that a portion of the equity in the home will be “set aside” and won’t “count against” the owner of the home when he keeps it at the end of the day. The owner of the home will only need to “buy out” the other spouse for half of the value of the home that has appreciated during the marriage and is considered marital property.
HOUSE TITLED JOINTLY
If a house is titled jointly then we know the house was either purchased during the marriage or one of the spouses chose to title his or her non-marital property jointly with the other spouse. In both cases, we now have a presumption that the property is completely marital.
And if the property is marital, then the equity in the house is presumed to be split equally between the parties. What’s more, the court has the additional power of ordering the sale of the property during the divorce if needed to create a fair resolution.
Sometimes we run into the situation where a house is titled jointly but the mortgage is solely in one of the parties’ names. This is usually a result of one party having better credit than the other.
While this is not a problem in and of itself, it does suggest that the best person to keep the home will be the one with the mortgage in his or her name. After all, if that party does not pay the mortgage and loses the home, it will not affect the other party after the divorce.
THE EMOTIONAL APPEAL OF DECIDING TO KEEP HOUSE OR SELL AFTER DIVORCE IN FLORIDA
In a perfect world, we rationally analyze the problem of the home based on the numbers. It is rare, however, for both parties in a divorce to be so detached emotionally that they can make this happen.
In many cases, especially long-term marriage, the home is “where the heart is”. Often children have been raised, pets have come and gone, neighborhood friends solidified, and the home has become part of each person’s identity. This emotional attachment can and often does short-circuit the logical analysis of distributing the home.
Less obviously, a dependent spouse can come to associate the home with stability and safety. For the supporting spouse, this emotional tie cannot be underestimated.
Consider the case of the long-term (20 plus year) traditional American marriage. The husband is a traveling salesman who has focused heavily on his career and spends substantial time away from the house. While the husband worked, the wife stayed home, tended to the home, and raised the children.
While the husband relied on the wife to raise the children, the wife relied on the husband to support the family financially. The wife may not have worried about where the money was coming from, because that was never her responsibility. Her responsibility was to defend the home, and the husband’s responsibility was to go out in the world and bring in the dough.
The children are out of the home, and the parties have grown apart. Then the husband files for divorce and asks the court to order the home sold.
The husband in this scenario has a good grasp on the finances and believes that the best standard of living that can be had for both parties post-divorce is that the home is sold and both parties find more appropriate (but smaller) housing.
But does the wife understand this?
Very likely the wife will rebuff the idea of selling the home because the home makes the wife feel safe and secure. The husband has worked and will continue to work. Sure, alimony is often a big issue in a case like this, but early in cases like these, it is difficult for the dependent spouse to understand the economic impact of alimony and expenses.
The dependent spouse has a secure feeling in her house that overrides any reasonable analysis. So, what can the parties do to get over this emotional bump and more logically address the problem of the home?
DIVORCE FINANCIAL ANALYSTS AND ACCOUNTANTS
The best thing for both parties in the case above is for the wife to have the counsel and advise of a forensic accountant or divorce financial analyst.
These financial experts can review the numbers for both parties, and help prepare a budget for the wife showing what her needs and expenses will be after the marriage. The financial expert can analyze the problem both with the wife keeping the home and with the home being sold. The expert can then help the wife by showing the actual economic impact of keeping the home.
In some cases, the wife can indeed keep the home without a corresponding reduction in the standard of living or a decrease in investible assets. This, however, is not the usual case. More often, keeping a big expensive home that is too big for the wife alone can mean less disposable income for the wife after the divorce.
Just as importantly, keeping a home with substantial equity can mean a corresponding decrease in the wife’s share of more liquid assets like stocks, bonds, 401Ks, or money market accounts. A divorce financial analyst can help the wife understand the trade-offs so that she can make more informed decisions.
In the end, these cases are problematic because the dependent spouse does not have the information or knowledge to go out on his or her own and make it work. The solution is for both parties to recognize this and take the time and energy needed to empower the dependent spouse and get her up to speed. This usually requires a financial professional who the dependent spouse can develop a trusting relationship with.
MOVING OUT OF THE HOME DURING THE DIVORCE
Moving out of the home during the divorce can affect how we divide the home.
Abandonment: First, parties are concerned that if they move out of the home they will have “abandoned” their family and will suffer as a result. Abandonment is not a legally recognized concept in Florida. Therefore, you don’t have to worry about destroying your chances at a good timesharing plan or losing the equity in the home as a result of moving out of the home.
However, there are practical problems with leaving home. Consider the example of the husband and wife living in the home. The parties have two minor children. The husband is the breadwinner and typically pays for the home expenses.
The parties are heading for a divorce. The situation becomes quite tense in the home, with screaming and arguing. The husband decides to move out of the home into a small apartment 10 minutes away.
Increases Expenses During the Separation: First, the husband will need to be ready to pay heightened expenses during the pending divorce. While every situation is different, the husband will likely need to continue paying a substantial portion of the expenses associated with the home during the separation. This is especially true if the wife is unemployed and has very little ability of her own to pay down the bills in the short term.
And of course, the husband will have his own bills to pay. Whether he moves into an extended stay hotel or a small studio apartment, the expenses for the parties have effectively doubled.
Appropriate Housing for Children? Now, the husband wants to maximize his timesharing with the children in the long run. But in the short run, the husband took the honorable route and got a tiny studio apartment. This creates a practical problem: How is the husband going to have substantial overnights with the children in his new place? Will the wife agree to exit the home during the pending divorce, so the husband can come back in and have overnights with the children?
The Home is Less Likely to Be Awarded to the Husband: The home is now less likely to be awarded to the husband in a divorce. This is just simple common sense: if the husband vacated the home, the court will be less likely to award it to the husband many months down the line at the end of the divorce. Now, the husband may have no interest in keeping the home and may want the home liquidated. However, it is important for the husband to review these issues before leaving the home as demonstrated in the case example above.
WHEN IT MAKES SENSE TO KEEP THE HOME
- Minor Children Still in the Home: Have minor children that will be sticking around for a while before going off to college? Trying to keep the home makes sense for two reasons. First, you are going to need the space for the children; children only get bigger as they grow older. Second, it is important to look for ways to provide stability to children in an otherwise unstable situation.
- A Good Mortgage deal is making living expenses lower: Do you have a low balance on the mortgage locked in with a great fixed rate? Minimal homeowner’s association expenses? Relatively cheap taxes on a yearly basis? In some cases, it might make more financial sense on a monthly basis to keep the home.
- Enough Marital Assets to Buy Out the Other Spouse: Remember, you need to make sure that the other spouse gets his or her fair share of the value of the home in the divorce. If you have enough other assets to draw from to buy out the other spouse, then it might make sense to keep the home. Be careful though: You want to have enough other assets that you have a balanced investment portfolio. It is rarely advisable to give away all of your liquid assets in a divorce, and only be left with the illiquid house.
- Unequal Distribution of Assets to Minimize Alimony: In some cases the breadwinner spouse may give a high percentage of assets to the other spouse in order to reduce the alimony obligation. If so, then there might be enough cash and other reserves available so that you can refinance or pay off any existing loan on the house. If so, keeping the house might make excellent sense.
- Dual income earner so refinance is option: Finally, is refinancing a viable option? If one of the parties can indeed refinance the home with minimal effort, then the other spouse may be able to get his or her share of the buyout as a result of the refinance.
WHEN IT MAKES SENSE TO SELL THE HOME
- Assets are limited or can’t buy out: In some cases, a spouse simply may not have the ability to buy out the other spouse. For example, if the parties’ major asset during the marriage is the home, income is relatively modest for the parties, and there aren’t any other assets to liquidate, it may be that the party who wishes to keep the house can’t come up with enough cash to buy out the other party. In these cases, the only option is to sell the home.
- Need to free cash up: In other cases a party may wish to free up cash to do other things after the divorce. Whether it is paying off debt, buying a new boat, or spending six months in South America, sometimes people want to free up cash during and after a divorce. In such a case, the cash in the home may be enticing, making selling the home the best option.
- Home is too big and too expensive, thus not a “good deal”: Sometimes when income is good, spending correspondingly increases. But that does not mean that spending is a good deal. Is the home too big? Too expensive to run? Are the pool and high ceilings eating up your monthly cash allotment? Perhaps moving on is the best move.
- Kids out of home: If the kids are gone, then why keep the home and all the maintenance involved? With kids out of the home, perhaps the best course of action is to minimize the amount of square footage that needs to be maintained.
HYBRID: EXCLUSIVE USE AND POSSESSION AND THEN SELL HOW TO GET TO “HOME SOLD”
- Plead Partition in Florida: If the goal is to have the judge order the sale of the home, the first step is to request a Partition, or sale, of the home in your initial divorce pleadings. This is a second count added to the divorce, called a Partition count. To have the standing to ask the judge to order the house sold, the home must be jointly titled. If only your name is on the title, then you won’t need to ask for that relief.
- The Court will Partition the property if you can show there is not a fair way to work out the property issue without selling. If there is not enough money to buy out the property, then you have a good argument for requesting the sale of the property.
- Hire a Divorce Analyst to Educate the Other Spouse: While asking the court to sell the property is a great first step, the reality is the vast majority of cases settle out of court. Your goal should be to increase the chances of getting the other spouse to agree to selling the home. Here, transparency and education is vital. If the other spouse wants to keep the home but you know it does not make financial sense, look for ways to educate the spouse. Telling them directly will probably not work. You are going through a divorce after all. Therefore, the better chance is to use neutral third-party experts to help facilitate the process. A divorce financial analyst, as mentioned above, can help use cold hard numbers to tell the story of what is really going on, and what resolution really makes sense.
HOW TO KEEP THE HOME
- Legwork: Show you can refinance: If your home is jointly titled, then you have some work to do if you want to refinance the home. You need to show your spouse that a buyout will not hurt them at the end of the day. If you can refinance the property, then you can remove your spouse’s name from the mortgage. In settlement negotiations that will make your pitch to keep the home more palatable.
- Maximize alimony, even in the short term, or maximize employment: To help make sure you can refinance the home, you may want to negotiate a deal that maximizes alimony – even if it is in the short term. Lenders want to see that your income is sufficient to cover the mortgage. Lenders count alimony as part of your income when you try to refinance. And if you are unemployed or underemployed, consider working hard now at the onset of your case to secure a job with a quality income. The higher your income, the better the chance you have at refinancing the property.
- Build Case on Stability for children if you keep the home: If you want to keep the home to maintain a stable environment for the kids, then start building your case now. Can you articulate to your lawyer exactly why this would be in the best interests of your children? How long have they lived in the current home? Are they still minors, and therefore still need the court’s attention? How close is school? Extra-curricular activities?