Two Strategic Planning Strategies for Divorcing Clients with Real Estate & Mortgage Financing

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.

Scenario 1 : Managing Requirements to Count Maintenance and Child Support as Income

When a divorcing spouse needs to use maintenance and/or child support as qualified income for mortgage 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 in order to use this income as qualifying income for mortgage financing. Unfortunately, nobody wants to hear they might need to wait six months once the divorce is final before they can 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 wait 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, in order 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 ordered in permanent orders! For example, if temporary orders state that maintenance in the amount of $1,000 per month is to be paid and is paid for 5 months consistently followed by permanent orders for maintenance to be paid in the amount of $5,000 per month. As long as there is one month paid at the $5,000 per month amount, the borrowing spouse can qualify off of the $5,000 per month.

The strategic plan establishes temporary orders and begins maintenance payments to the receiving spouse as soon as possible in order to obtain mortgage financing in a timely fashion.

Scenario 2: 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 in the near future? If ownership of the marital home is transferred to the receiving spouse, that spouse may pay capital gains tax on $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 in order 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 clients. Per IRS Publication 523, as long as the vacating spouse has used the marital home as their primary residence for two years during the course of the marriage they will satisfy the ‘use period’ requirement of 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

In order 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 course of 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 end result is there is no capital gains tax on the sale of the marital home.

The strategic plan reduces or completely removes any potential capital gains tax on the sale of the marital home.

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