Selling Your House During or After Divorce? Knowing your options could save you money and a lot of headache.
Selling Your House During or After Divorce?
Knowing your options could save you money and a lot of headache.
Written by Courtland Young
your San Diegan Local REALTOR® BRE# 01468400
Divorce is not easy and understanding the financial impact can be even more complex. You would think, since just under 50% of all marriages end in divorce it should be just as easy as getting married, but the reality is, it is not. There is so much to think about, but the main thing is you must remain level headed and put together your game plan early.
As most of my readers know, I was a financial advisor for many years before getting into real estate and divorce had to be one of the hardest things some of my clients had to deal with and still is. Most of my clients during the initial phase of the divorce were very amicable with each other, until they got down to the money. The longer the divorce went on, the higher the emotions got. Many people handle this type of stress differently. Some of them will be able to think rationally, but most people just want the situation to go away and would do anything they could to end their ties quickly, which can lead to bad decision making; like selling your house to the first person that makes you an offer on it.
if you must sell, you must be strategic and have a plan in place when you go to unload your investments and Real Estate to get the best price possible for your assets and this is where I see most people fail. I’ve heard of people selling their home to an all cash investor for hundreds of thousands less than if they would have just listed it with a REALTOR®. Obviously, when going through a divorce the court will usually divide all the assets and this may mean that you will need to sell some assets whether you feel its’s the right timing or not.
We have all seen the ads for people wanting to buy your house for all cash and they claim to be a Real Estate investor. Regardless if they are or if they are not, is not the issue. What is the issue, is the price you could sell the house for by putting it on the market. The first thing I would recommend is to sit down with a Real Estate Professional that has worked with divorcing clients and that is accustom to working with attorneys. Many times, the court will ask the Realtor® or Real Estate professional for advice, so you need someone that knows the market and can basically act as the quarterback or conductor, orchestrating all the moving pieces into a cohesive plan to get your house sold for the most amount of money possible while looking out for both of your best interests.
With that said, sometimes, it may be the right call to sell it to an “investor” because your property has a lot of deferred maintenance, is in poor condition, or you’re in the middle of foreclosure proceedings (in this case I recommend talking with a Bankruptcy attorney first). Most Realtors® have an investor list and our able to steer you in the right direction as to your options of whether to list it or sell it to an investor.
If the recommendation is to sell it to an investor because of the poor condition of the house, I would recommend getting a minimum of 3 different offers from 3 different sources. So, if your “investor” brought you one offer, I would look for two more offers from someone not associated with the other offers. This way you will have a good idea of what value your house is worth. It would also be a good Idea to get a home evaluation done by an independent third party as well. Whether you decide to list the property or sell it to an investor you still may have a hefty tax liability depending on how much equity there is.
Now, if the house has been your primary residence for 2 of the last 5 years you qualify for a 121 exclusion see IRS publication 523. Which means you can exclude $500,000 of the capital gains of the property from taxes if filing jointly or $250,000 each if filling separately. This however could create an issue if you have a capital gain of over $500,000 because then you will have a tax liability. Now if you’re in the military and are on extended duties more than 90 day or you’re at a duty station more than 50 miles from your house or residing in government housing an exemption can be given for up to 10
years. It is recommended to talk to your tax accountant or CPA as per your specific situation, especially if you think you’re going to exceed the IRS exempted amount or if yo
u have other real property, such as: raw land, rental homes, a business, stocks, Jewelry, bonds etc. Also, when negotiating/dividing your assets among one another, you need to understand what the real value of the assets are after you pay the tax bill. To do this, you will need to understand your basis (value you bought the asset for) and subtract the basis from the sell amount of the asset. What is left is your profit and you will need to pay tax on the profit, unless you fall under an exemption, like your home could.
I mention this because many people underestimate their tax liability when negotiating their divorce. Now, if you have a good attorney, they should catch this. At the same time, many people are choosing to use a mediator in their divorce to save on attorney fees. Using a mediator could be a good option if both parties are willing to work with each other and talk about what’s important to them to come to a resolution. But, I have found when it comes to the house most people have an emotional attachment to it and do not react rationally. One spouse may want to keep the house and have the other spouse buy them out. This could be a viable soluti
on and an alternative to selling your home. However, the real question should be can you or your soon to be ex afford to keep the house on their income. So many times, I’ve seen one person buy the other person out, only to have to sell it a year or two latter or worse yet, loose it in a foreclosure because of financial difficulties.
But, what if you don’t want to sell because the market is moving up? It could be a good strategy to hold on to the house for a few more years (just remember the 2 out of 5 rule we talked about earlier). You and your ex could decide to either rent it out or one of you could live in it, just remember to re title the property as co-owners and put something in the divorce settlement that states that you both agreed to be co-owners. Both situations would leave you with a $250,000 tax exception upon sale of the house. Just remember that if you decided to rent the house out for more than 2 of the last 5 years you will not qualify for the tax exception and will be liable for the tax associated with the profit made. If you fall into this category you can always do a 1031 exchange and defer taxes, but this does fall under a whole different set of IRS rules and regulations, which I will dig into deeper in another post.
I hope you found this to be an informative piece and if you liked it, please fell free to share it on Social Media.