short sale

We are in the midst of the Spring real estate season and this is the time during a divorce when one spouse will inevitably want to list the marital home for sale. Often times, the parent likely to be the primary custodial parent will offer resistance with the best of intentions, because he or she wants to keep the house for the kids.

I am often approached by a client who tells me that they are willing to give up other assets in order to maintain the marital home. This may be for a variety of reasons, but most often because a parent wants to minimize the trauma of the divorce on the children and believes that remaining in the home that they have grown up in is the way to accomplish that.


But, at what cost? While minimizing transition for the kids is an admirable goal, I find that in many cases, the person who wants to stay in the house does not truly understand the expenses associated with keeping the house, both now and in the future. So I try to make sure, sometimes with the assistance of a financial adviser, that my client is making a decision that really makes financial sense.


In the vast majority of cases, the person who will keep the house has to refinance, or otherwise assume a mortgage in order to remove the other spouse from liability for the mortgage and note as well as any home equity lines of the property. This means they have to be able to qualify for the entire amount of debt on the home by themselves. Plus, they have to pay all of the costs associated with the financing such as closing costs and points on the mortgage. Finally, they will likely have to pay the other spouse one half of any equity in the home. This costs can be substantial.


When paying the other spouse their equity in the home, sometimes there are other assets with which to offset the issue of paying off the other spouse. However, this is not a step to take lightly. Often, I see litigants give up all of their other liquid assets in order to keep the house. The result can be that there are no savings in case of an emergency, or in the event of loss of employment, something that is a real threat in the present economy. Other times, litigants will trade off their share of their spouses retirement to keep the house. This is a dangerous move, particularly if the litigant has traditionally been the non working spouse throughout the marriage and does not have enough years to accumulate retirement funds after the marriage is over. As we know from the current real estate market, we can’t count on the value of property to go up or even remain the same.

Continue Reading Is Keeping the House Really a Good Idea?

In light of the current economic crises plaguing our country, your home may be on the brink of foreclosure, or will be sold by way of a short sale. You may also have staggering credit card debt. Therefore, when entering into a property settlement agreement that involves debt forgiveness (i.e. foreclosure, short sale, and reduction in credit card debt) it is critical that you choose a matrimonial attorney that is aware of the tax consequences associated with debt forgiveness because the financial impact can be enormous.

Historically, debt that was forgiven or cancelled by a commercial lender must be included as income on your federal and state tax return and was taxable. For example, if the total amount of the mortgage debt immediately prior to the foreclosure was $220,000 and the fair market value of the property was $200,000, the amount of the debt forgiven, $20,000, was treated as taxable income. Unless of course the borrower qualified for an exception under the Federal Tax Code, i.e., bankruptcy, insolvency, certain farm debt, and non-recourse loans.

On December 20, 2007, the Mortgage Debt Relief Act of 2007 (hereinafter referred to as “the Act”) was enacted. Said Act provides financially strapped homeowners with some relief in connection with treating debt forgiveness as income. Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on a principal residence that occurred in 2007, 2008 or 2009. Moreover, there is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven.

Continue Reading Debt Forgiveness: Watch Out for the Tax Consequences