You’ve seen it before perhaps. A girlfriend you know is going through divorce and is emotionally tied to the family home and wants to keep wearing her rose colored glasses – the ones that don’t show the entire reality of the situation. On the surface, the home was a place the kids were raised, parties were thrown, and memories were made – maybe some while enjoying a glass of wine. It represented security, comfort, and a stable environment. She might think she can go on drinking a predictable Merlot and then fast forward a few years and a tax bomb is waiting to go off equivalent to opening that bottle of Merlot and discovering it has corked! This could have been prevented. But it would have required wearing a pair of wine colored glasses – the ones you can see out of with the most clarity.
This clarity comes in the form of proper prior planning. I cringe when I hear the stories of the wife foregoing cash for the equity in the family home. Think of equity like a bottle of wine you can’t open that sits on a shelf that you think is aging and becoming more valuable when in actuality it can go up or down at anytime depending on the market. You don’t realize the IRS might be a joint investor – waiting to get the biggest pour out of your bottle!
If she can’t afford the family home after a few years pass, or the child support runs out or alimony and she goes to sell the property, capital gains could be waiting for her! She’s single now and qualifies for $250,000 tax free gains. If her gain is over that amount, the IRS is waiting with an empty glass – get ready to pour out some of your profits.
If you know keeping the family home is a short sided decision that requires another decision in the future, I hope you factor in the capital gains tax when you swap equity for cash in your divorce settlement. Did you consider leaving your Ex on the title as joint tenants and then selling later and splitting the equity? At least you could both take $250,000 provided his occupancy period is satisfied (2 of the last 5 years).
There are two special rules relating to divorce. So see your CPA. Under the right circumstances, the spouse that transfers ownership to the receiving spouse might be able to use the spouses time in the property to satisfy the use period. Be careful though, you need to be clear in your divorce agreement and how title is held is a factor.
There are a number of ways to divide the house and each of them needs to be looked at closely. Divorce is messy and sometimes housing issues can not be as clean as we would like. But you can manage the tannins in the process and eliminate the possibility of becoming corked later.
Consider a Certified Divorce Analyst, Financial Planner, Certified Real Estate Divorce Specialist® to conduct the proper due diligence and strategic planning with your real estate. Keep your wine close, and only share it with your friends.