To Sell or Not to Sell: That is the Question

1. SCMA 2019 Family Mediation Institute To Sell or Not to Sell:That is the Question Legal, Financial, Tax and Psychological Issues Regarding the Marital Home

2. Today’s Panel

3. Options for the Marital Home • Immediate Sale • Deferred Sale • Buyout • Co-Ownership • Retain as a rental property • “Nest”

4. It Takes a Team • Mediator’s role: help couple consider all their options • Real estate agent or appraiser’s role: value the home • CDFA’s role: analyze and communicate whether one party can afford to keep the home and predict future consequences of financial tradeoffs • Mortgage consultant’s role: determine if qualification is possible and budget goals can be met • Tax advisor’s role: anticipate unintended consequences and minimize tax burden

5. Setting Expectations • Educate clients on financial realities of life after divorce: • Ask clients if they have made any decisions • Drill down to how that plan might work • Use curious but non-judgmental questions to draw out expectations and depth of understanding • Is immediate home ownership affordable and feasible? How directive should the mediator be?

6. 1. Immediate Sale of Home • What happens if both parties don’t agree on sales price? • If one person moves out how will cost of property tax, mortgage, HOA, maintenance, repairs, and prep for sale be managed? • If both spouses are at least 55, who will take Proposition 60/90 property tax benefit? • When and how to educate parties on separate vs. community property issues and reimbursements and credits

7. Family Code Section 2640(Separate Property Claim) A. “Contributions to the acquisition of property,” include down payments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property but do not include loan interest or payments made for maintenance, insurance, or taxation of the property. B. Unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division. C. A party shall be reimbursed for the party’s separate property contributions to the acquisition of property of the other spouse’s separate property estate during the marriage, unless there has been a transmutation in writing or a written waiver of the right to reimbursement.

8. Moore Marsden Calculation • Determine community’s equity interest when home was purchased by one party before marriage (community receives reimbursement plus pro tanto share of appreciation from DOM) • Check for interest-only loans • How the calculation is altered if the loan was refinanced during marriage • Who determines if transmutation occurred?

9. Watts Charges & Epstein Credits • A "Watts Charge” is to reimburse the community for value of a party's exclusive use of a community asset after separation. If one spouse has benefited from exclusive use of the home post-separation, the other spouse may be entitled to reimbursement or an equalizing credit of the asset's fair market rental value. • However, if the spouse in possession of the home is making the monthly mortgage payment, they will not be required to further compensate the community for its use, unless its rental value substantially exceeds the monthly payment. • “Epstein Credits” may occur when a joint mortgage is paid from separate property funds post-separation and do not apply if the payment is made out of a shared bank account.

10. 2. Deferred Sale of the Home • Risk of changing market conditions (interest rates and values) • To meet a benchmark like child going to college or one spouse going to school • Reimbursements/credits may become larger issue • Can either spouse withdraw from the deal? • Title issues • Insurance issues • And…

11. Tax Issues • If the ex-spouses continue to co-own the home after the divorce, it’s often difficult for the spouse who moved out to meet the primary residence use test of living in the home for an aggregate of two years prior to the date of sale. This can make that person ineligible for the $250,000 capital gains tax exclusion. • The marital settlement agreement must stipulate with special language that the ex-spouse who’s moving out will receive “credit” for their ex’s continued use of the property until the home is sold, making it possible for them to still pass the use test and qualify for a $250,000 exclusion. • Treasury Regulation 1.121-4(b)(2): “Property used by spouse or former spouse. A taxpayer is treated as using property as the taxpayer's principal residence for any period that the taxpayer has an ownership interest in the property and the taxpayer's spouse or former spouse is granted use of the property under a divorce or separation instrument (as defined in section 71(b)(2)), provided that the spouse or former spouse uses the property as his or her principal residence.”

12. Equity Buyout • Challenges with trading one set of assets for another • Forced sale if spouse cannot refinance the mortgage • Mortgage qualifying challenges • Child and spousal support level and duration • Qualifying strategies • Interim agreement • Departing spouse’s mortgage qualifying issues • Warning about having to sell home in the future ($250K instead of $500K capital gains exclusion)

13. Co-Ownership • Nesting is becoming more common due to financial realities • Are the spouses candidates for nesting? • Co-own and rent out the house to tenants • Buy/sell agreement

14. Alternative Loans • Using a co-signer • Reverse mortgage • Equity appreciation sharing • No documentation loan

15. Addressing Other Types of Real Estate • Timeshares • Rental properties • Investments with other people

16. Contact Info