Mortgage and Divorce: Strategies for Positive Outcomes
One-way of achieving success in a divorce situation, is to formulate an effective strategy to tackle the case before you and this is where strategic planning comes in.
Strategic Planning – Divorce
A lack of strategic planning in divorce can very quickly and easily lead to a drainage of emotional and financial resources which will inevitably make recovery from the divorce more difficult.
Why it’s Important to Have a Strategy!
A strategy creates a vision and direction for the divorcing individual as well as all parties involved. It is important that all parties involved have clear goals and are following the direction, or mission of the individuals involved. A strategy can provide this vision and prevent one from losing sight of the end goal.
Why it’s Important to Have a Plan!
The desired outcome following a divorce is the reason that planning is important. Thus, because planning helps you decide short and long-term goals, it helps you make decisions faster. Flexibility – the importance of planning increases in a situation where stability has not been observed.
Let’s be honest about this. The importance of strategic planning in divorce is often being overlooked and very often, completely absent in divorce cases, regardless of who the parties are or the extent of their wealth. Clear goals and strategies are essential to success in virtually anything in life and the lack of goals and strategies, almost always leads to a disappointing outcome, if not to a financial and personal disaster.
Two Strategic Planning Strategies for Divorcing Couples with Real Estate & Mortgage Financing
One: When a divorcing spouse needs to use maintenance income and/or child support as qualified income for mortgage qualification and financing, the income MUST meet two requirements. For conventional financing, the borrowing spouse must show six (6) months receipt of maintenance and/or child support as well as three (3) years of continuance to use this income as “qualifying income” for mortgage financing purposes. Unfortunately, nobody wants to hear they might need to wait six months once the divorce is final before they may qualify for a new mortgage whether refinancing for an equity buyout or being able to purchase a new home after selling the marital home.
One way to help mitigate this waiting period, with the help of your attorney, is to establish temporary orders and get the receipt of maintenance and/or child support started as soon as possible. While child support may not necessarily require temporary orders, for maintenance to meet the requirements of qualified income, temporary orders are required since maintenance/alimony cannot be voluntary. The temporary orders and the start of paying/receiving maintenance early through temporary orders starts the clock on the six-month requirement.
Here’s the Strategy – The temporary maintenance payment does not need to be the final amount declared in the permanent orders! For example, if temporary orders state that maintenance in the amount of $1,000 per month is to be paid for 5-months consistently followed by permanent orders for maintenance to be paid in the amount of $5,000 per month. If there is one-month paid at the $5,000 per month amount, the borrowing spouse may qualify off all the $5,000 per month.
The strategic plan is to establish temporary orders and begin maintenance payments to the receiving spouse as soon as possible to obtain mortgage financing in a timely fashion.
Two: Minimizing Capital Gains on the Sale of Real Estate
Nobody wants to pay capital gains taxes on the sale of the marital home; however, in today’s real estate market the potential for capital gains tax is very real. Divorcing clients who may have purchased their home 15-years ago at $350,000 have realized an average appreciation rate of 5.6% nationally. That equates to an appreciated value of $792,550 or a capital gain of $442,550. The current single exclusion for capital gains is $250,000 and the marital exclusion is $500,000. But what happens if one spouse is awarded the marital home and plans to sell the property soon? If ownership of the marital home is transferred to the receiving spouse, that spouse may pay capital gains tax of $192,550.
One way to mitigate the capital gains tax is to work with a tax planner and discuss the option of leaving the vacating spouse on title of the marital home. While the current tax rules state that to use your capital gains exclusion on the sale of a primary residence you must have lived in the property for two of the last five years, there is an exception to this rule for divorcing couples. Per IRS publication 523, if the vacating spouse has used the marital home as their primary residence for two years during the marriage they will satisfy the ‘use period’ requirement for the exclusion. The key is to not remove the spouse from title because the second requirement for using the exclusion is ownership and the only way for divorcing clients to establish ‘ownership’ in the property is for both parties to remain on title to the home.
Here’s the strategy – To use the vacating spouse’s capital gains exclusion of $250,000 towards the $192,550 in the above scenario, the vacating spouse must have used the marital home for two years during the marriage and the vacating spouse must remain on title to establish ownership until the home is sold in the future. In doing so, the $192,550 is absorbed with the vacating spouse’s individual exclusion. The result is there is no capital gains tax on the sale of the marital home.
The strategic plan is to reduce or completely remove any potential capital gains tax on the sale of the marital home.
Bonus Strategy: Involve a team of professionals at the beginning stages of strategic divorce planning!
A professional divorce team has a range of team players including the attorney, financial planner, accountant, appraiser, mediator and yes, a divorce lending professional. Every team member has a significant role in ensuring you are set to succeed post decree. A Certified Divorce Lending Professional brings the financial knowledge and expertise of a solid understanding of the connection between divorce and family law, IRS tax rules and the mortgage financing strategies as they relate to real estate and divorce.