In September of 2008, I posted a blog entry on The Value of Real Estate – Problems in this Ever Changing Market. In that post, given the decline in the real estate market, it was posited that retaining the marital home may not be the best financial strategy. Unfortunately, little has changed in the real estate market since that time to change conclusions of that post.
That said, in many cases, the marital home remains the single largest asset to divide in divorce. Moreover, with the continuing troubles in the economy, it may represent the only way for either or both of the parties to wind up with liquid funds after the divorce. Now if the home is going to be sold, or one party is going to buy out the other, then there usually is little dispute other than logistics of sales price, how soon to reduce the price, how to handle repairs until sale, etc.
The problem arises if one party wants to defer distribution to allow the child(ren) to finish high school, etc. There is a question of fairness to the other spouse whose equitable distribution is tied up as may be their ability to buy a house of their own both (1) because they don’t have the money for a down payment until they get their share of the house or (2) they are still on the mortgage of the marital home. Further, due to the decline in the real estate market, parties are now also agreeing to defer the distribution for some period of time in hopes that the market will rebound, as opposed to selling now.
There is not a lot to do about the second problem noted above if there is gong to be a deferred distribution. However, as to the first problem, there are a few ways to handle it.
Specifically, in the event of a deferred distribution, the parties can take out a home equity line which would be paid to the spouse not residing in the house as an advance against their equitable distribution. Either that party can be solely responsible for the payments on this loan until the house is sold. Alternatively, an additional amount an be borrowed to service the loan for which the parties can divide equally or some other equitable way.
In the case of a buyout, perhaps a party cannot get a mortgage to refinance the outstanding balance plus also pay the other party for their share of the equity. They may wish to offset the share of the equity against other assets. Some people might find this acceptable but others may still oppose this because while they may be getting more in retirement assets (but these usually should not be dollar for dollar offsets because retirement assets are tax deferred and thus, need to be grossed up), they still may not be getting liquid funds which they desperately need to buy their own home. In this case, perhaps the buyout of the home can be accomplished by a partial cash out from the home plus an offset of other assets.
Another cautionary note – if the offset is going to be against investment assets, attention should be paid to make sure that embedded capital gains in the investment assets are considered so that the value each party receives is approximately economically equivalent.
In any event, resolution of the issue, while challenging, should not ordinarily be insurmountable. It just may require some creativity and cooperation.