Transferring House Ownership After a Divorce

June 30th, 2014

One common way to transfer house ownership is with a quitclaim deed, a legal instrument by which the owner of a piece of real property, called the grantor, transfers any interest to a recipient, called the grantee. The owner/grantor terminates (“quits”) any claim to the property and transfers the claim to the recipient/grantee.

The vacating spouse uses the quitclaim deed to “quit,” or give up, all “claims” to, rights in, and ownership of, the marital home. In exchange, the spouse who retains ownership pays “valuable consideration” — money, or an item with monetary value — to the spouse filing the quitclaim. In a divorce, one spouse terminates any interest in the jointly owned marital home, thereby grants the receiving spouse full rights to the property.

For example, when a wife acquires the marital home in a divorce settlement, the husband executes a quitclaim deed eliminating his interest in the property and transferring full claim to the wife quickly and inexpensively.

A quitclaim deed contains no title covenant and offers the grantee no warranty as to the status of the property title. The grantee is entitled only to whatever interest the grantor actually possesses at the time the transfer occurs. In this the grantor does not guarantee that he or she actually owns any interest the property, or if he or she does own an interest, that the title is free and clear. It is therefore possible for a grantee to receive no actual interest, and – because a quitclaim deed offers no warranty – have no legal recourse to recover any losses.

Because of this lack of warranty, quitclaim deeds are most often used to transfer property between family members, as gifts, placing personal property into a business entity (and vice-versa) or in other special or unique circumstances. Quitclaim deeds are rarely used to transfer property from seller to buyer in a traditional property sale; in most cases, the grantor and grantee have an existing relationship, or the grantor and grantee are the same person. Further, if the grantor should acquire the property at a later date, the grantee is not entitled to take possession, because the grantee can only receive the interest the grantor held at the time the transfer occurred. By comparison, other deeds often used for real estate sales (called grant deeds or warranty deeds, depending on the jurisdiction) contain warranties from the grantor to the grantee that the title is clear and/or that the grantor has not placed any encumbrance against the title.

Tax Implications

June 3rd, 2014

Very often the marital home is the most valuable asset a divorcing couple divide, particular since the IRS permits homeowners to exclude from taxes a certain amount of capital gains from the sale of a primary residence. The gain (or loss) is the selling price of the home, minus any selling expenses, minus any adjustments or improvements. Currently, the IRS allows up to $500,000 for couples and $250,000 for individuals in capital gains exemptions.

In order to qualify for the $500,000 cap, the couple files a joint return for the year in question and meets the IRS “own and use test.” If either spouse does not meet the own and use test, then the maximum exclusion allowed would be the amount that each spouse would qualify for if treated separately. To qualify for the maximum exemption, the couple must have owned the house and lived in it and considered it their primary residence in at least two of the previous five years. The couple has three years starting from the due date of their return in the year of the sale to decide whether or not to take this exclusion. To exclude gain under the main home sale rules, a person generally must have owned and lived in the property as his or her main home for at least two years during the five-year period ending on the date of sale. If he or she has two homes and live in both of them, his or her main home is ordinarily the one lived in most of the time.

This exemption can only be claimed once every two years, calculated from the date of the sale, unless the reason for selling a second home within a two-year period is related to health, change of employment or unforeseen circumstances. In this instance, you may still be entitled to claim a reduced exemption.

Moreover, the IRS requires one spouse to have met the own and use test for married couples that file a joint return. This means that if the couple is still legally married and either spouse meets the two-year requirement, then the couple can still qualify for the full $500,000 couples exemption on their joint return.

The IRS “own and use” is satisfied when the spouses legally owned the property and one spouse continues to use the home as his or her primary residence under a divorce decree or legal separation agreement. That means that as long as a person’s remains on the deed and his or her spouse lives in the home, he or she is eligible for the full capital gains tax exemption when the house.

Divorce and an Underwater Mortgage

May 5th, 2014

Generally, when a married couple divorces, they split assets between them according to the divorce agreement. When the family house is worth more than its purchase price — in what used to be the normal situation — any appreciation is included in the value of the home. The home is either sold and each spouse takes an equal share of the proceeds, or one spouse keeps the property with the positive equity counting toward his or her share of the property division.

In the case of an underwater mortgage, however, the home is worth less than the mortgage balance. This difference between a home’s original purchase price and its present value is negative equity, and it can be very problematic when it comes time to divvy assets.

One way for dealing with an underwater mortgage is to provide a “credit” to the spouse who keeps the home. In this, the couples compensate for the drop in value by providing that spouse a bigger share of another asset. For example, if a couple’s joint assets total $500,000, including a home worth $250,000, one spouse keeps the home while the other takes the remaining $250,000 as part of the divorce settlement — 50/50 split. However, if the couple’s home is underwater by $50,000 (the mortgage balance is $300,000), for example, the spouse who keeps the home is awarded an additional $50,000 to compensate for that negative equity, and the other spouse gets $200,000.

This routine does present the possibility for an uneven distribution of assets. Home values are depressed now, but are certain to improve later. If the home undergoes a short sale or foreclosure soon, it makes sense to provide the homeowner a credit for the negative equity because there will be no opportunity to recoup that loss. However, if the spouse plans to keep it long-term, it is very likely to regain some, if not all, of the value lost following the housing market crash. That means the homeowner doubles his or her money in receiving a credit while the home is underwater and then selling the property when values have recovered.

In some cases, rather than making up for the property debt by allocating a larger portion of another asset, the couple simply “zeros out” the debt. They do not consider the negative equity when assets are split, and the person with the home receives face value. If one spouse decides to keep the home as a long-term investment and anticipates a lift in value eventually, this is a better course.

Zeroing out the debt is not always a possibility, however, depending on the state of residence. Some states require that all assets and liabilities be divided in a divorce, including negative equity.

Selling the house at a loss is one of the less desirable options for dealing with an underwater mortgage. This is known as a short sale, and it is only possible if the homeowner is financially incapable of paying the mortgage payments and the lender approves it. A short sale, however, can prevent the lengthy headache of a foreclosure; however, it can still be detrimental to the personal finances of the spouses, who receive less for the house than what was originally paid. This may amount to which may amount to a loss of tens of thousands of dollars or more. A short sale also damages credit; it can make it difficult to acquire new loans and favorable interest rates in the future. Moreover, the lender may still hold the borrower responsible for loan balance.

A short sale requires that the parties are clear about the terms and condition of the arrangement, particularly that the negative equity does not become the responsibility of the spouses following the sale. Finally, a short sale may result in unexpected — and potentially significant — tax consequences.

The number of options available may be dependent on the state’s divorce laws. These options for can help determine the best course of action, but good legal and financial advice during the process is imperative.

A divorce is chaotic enough, but a house with an underwater mortgage makes a bad situation worse. Over 20 percent of homes are currently underwater, so it is a common problem.

Marriage Counseling May Help

April 25th, 2014

Many couples going through rough waters in a marriage turn to counseling. Counseling can help a couple having problems, and troubled partners should not wait too long to seek professional help.

Partners who married at an early age, did not graduate from high school, are in a low-income bracket, or are in an inter-faith marriage are more at risk of a breakdown in marriage than other couples. Spouses whose parents divorced also run more of a risk of a marital failure. Additional red flags include frequent criticism, defensiveness and withdrawal.

Spouses who have realistic expectations of one another and their marriage, communicate well, use conflict resolution skills, and are compatible with one another are better set for sailing in smoother marital waters.

Some couples get more from counseling than others might. Young couples who love one another and do not have sexist views seem to benefit more from counseling. Spouses who wait too long before seeking help, those who are in second marriages and those who are closed to any suggestions that may save the marriage get the least.

A 1995 Consumer Reports nonscientific reader survey rated marriage counselors below other types of therapists, but a study by the American Association for Marriage and Family Therapy (AAMFT) showed that families do want therapy and place a high value on the experience.

Some research studies suggest that marriage counseling is not as effective as people think. Women seem to get more from marriage counseling than men. Research also suggests that counseling may not have a lasting effect on the couple’s marriage. Counseling appears to be most beneficial before problems reach a critical stage.

A Beneficiary, not a Victim

April 9th, 2014

Even when a breakup ends a marriage gone bad, separations and divorce hurt because divorce is a beginning that assimilates of the traumatic dislocations that happen when a marriage dies.

Breakups hurt so much, even when the relationship is no longer good, because divorce is a loss, not just of the marriage, but also of dreams and commitments. Romantic relationships begin on a high note of excitement and hope. When marriages fail, spouses who loved each other suffer profound disappointment, stress, and grief. They have seen each other naked (both literally and figurative) and have a knowledge and intimacy of each other that makes separation and divorce an amputation.

Divorce means a long slog in uncharted territory. Yesterday lies in ruins; tomorrow seems a mirage. At times, the unknowns may seem worse than the unhappy knowns of a failed marriage. Routines and responsibilities — home, family and friends, and even identity – all are deranged. Fears and uncertainty infiltrate the moment.

The sense of loss seems ineffable — the loss of companionship and shared experiences; the loss of support, be it financial, intellectual, social, or emotional; the loss of hopes, plans, and dreams. Going through the recovery, rather than getting over the divorce, are two different experiences. Rushing to escape the necessary suffering means missed opportunities to learn. Learning makes a person a beneficiary of suffering, not a victim.

A Mother’s Rights in Child Custody

March 19th, 2014

The mother of the child has certain rights and obligations in a custody action, but all courts, in determining child custody, use the best interest of the child as the standard.

In many cases, the mother is granted physical custody of the child because the child is often more emotionally attached to her than the father, and mothers often receive custody in contested cases.

If a judge decides that it is not in the child’s best interest to grant sole custody to the mother, however, the court devises a custody regime that better suits the child and his or her needs.

When determining child custody and visitation schedules, the mother’s has the right

> to interact with her child or children during visitation;

> to schedule activities during times when she has custody;

> to be free from the father’s control, interruptions, or threats during visitation;

> to notify a judge or the police if the custody order is violated;

> to petition the court to enforce changes in a custody order or visitation schedule;

> to obtain an injunction in order to prevent the father from removing the child.

Because a mother’s rights in child custody often overlap with the duties and responsibilities of the father, both parents must cooperate in divorced parenting.

Uncontested versus Contested Divorces

February 19th, 2014

A divorce is either uncontested or contested, and the process of divorce moves much faster when neither spouse contests the end of the marriage.

In an uncontested divorce, the spouses agree on the terms and conditions of the divorce. They agree about the division of community and/or marital property and debt, the custody of any children, and the payment of child and/or spousal support. In the contested divorce, one or more of these issues blocks a settlement, and the couple may have to go to court to resolve the issue.

Uncontested divorces allow for default judgments. A default judgment can be made when the defendant makes no response to the petition. The failure to respond results in a default judgment against him or her, and it is done deliberately. Uncontested divorces move more quickly through the courts and are less expensive than contested divorces, and an uncontested divorce reduces hostility, allowing both parties to resume their lives more quickly.

A Pension Appraisal is a Must

February 6th, 2014

Calculating the value of a defined benefit — the old-fashioned company pension – can be difficult because defined benefit pensions have what is known as present value, or time value of money, that is, what today’s money is worth tomorrow, which can make calculating their value difficult.

No one should attempt to divide a pension without first getting it appraised. Very often neither party in a divorce can negotiate the fair division of pension plan without a competent pension appraiser first making an appraisal.

A pension plan can be the most valuable asset a couple divides in a divorce.  It is much too valuable not to take care.

Other Options to End a Gay Marriage

January 24th, 2014

Just like straight couples, gay men and woman who build lives together sometimes find that the relationship does not last. And just like heterosexual couples ending the union, dividing assets, interests and debts of the partnership requires careful thought and unselfish consideration.

Absent a prenuptial agreement that outlined the rights of each should the relationship end they are left with gay couples have three options:

> Private negotiation. Since there is no legally binding contract there is no balance of power. One partner may walk away with more than is his/her right, and communication and compromise can be difficult.

> Divorce attorneys. This option could is expensive since both partners have the cost of a lawyer, but since there is no need to file in the courts, couples would not be faced with that extra expense.

> A private mediator. The couple turns to the guidance of a mediator. They negotiate a legally binding contract and, within a shorter time span.

Each of these options may demand that the partners improvise solutions. For example, the second parent of a child who is not biologically related to it may want visitation rights that would normally be automatic to any parent.

The Six Steps of a Divorce Trial

January 7th, 2014

A divorce that goes to trial (only a tiny fraction do) has six steps. They are

> 1) The Petition, which identifies the parties, gives the basics of the marriage and states the grounds for ending the marriage;

> 2) The Service of Process, which is the delivery of the petition to the respondent (or defendant) and a summons to appear;

> 3) The Response, in which the Defendant replies to any allegations made by the petitioner (or plaintiff), usually within 30 days;

> 4) Discovery, which includes a financial investigation of the marital estate; negotiation, wherein the parties attempt to reach agreement about the terms and conditions of the divorce and sometimes a settlement;

> 5) The Pretrial Conference, which, when the parties are unable to reach agreement, happens in a judge’s chambers when both attorneys present their respective positions and the court makes recommendations in hopes of a settlement;

> 6) The Trial, which happens when the parties cannot negotiate a settlement.