Real Estate, Mortgages, and Taxes in High Asset Divorce

When entering a high asset divorce in California, anxiety over your future is often overwhelming. Years ago, a friend of mine went through a nasty divorce. They had a high collective income, although the wife earned significantly less than the husband. They held a high net worth of assets comprised of real estate, pension, and retirement holdings.

The couple would only speak to each other through their divorce litigation attorneys. As a result, their divorce was emotionally and financially draining. After nearly two years of court hearings, they were set for trial.

On the day of trial, the judge warned both spouses that if they could not reach an agreement, neither would be happy with his orders. He ordered them to step out into the courtroom hallway, with their lawyers, and settle the case. The end result was that the wife agreed to buy her husband out of the family home to the tune of approximately $200,000.

When I heard this, my first thought was, “where are you going to get $200,000?”

This illustrates what most couples don’t know about the practical side of real estate issues in a high asset divorce in California, in situations where one spouse earns less income than the other.

Be aware of income requirements to qualify for a loan

Whether you are in a contested (“litigated”) divorce or you are working together in a mediation or collaborative divorce process, if you own real property, and are both on the mortgage, odds are at least one of you will need to qualify for a new loan. This might mean refinancing to take the other person off the loan and pay them their community property equity interest, or to purchase a new home.

Many divorce judgments state that one spouse will refinance the house within a specific period of time—30 days, three months, six months—or sell the property. These orders often do not address the reality of qualifying for a new loan.

Lenders in a conventional or conforming loan require six consecutive months of income, says Ross Garcia, Certified Divorce Lending Professional with Divorce Mortgage Advisors. A jumbo loan requires three to twelve consecutive months of income, depending on the lender. Conforming loan limits vary from county to county across California.

How spousal support (alimony) considerations affect loan applications

The loan will likely be denied if a spouse is using spousal support (alimony) to qualify for the loan and the spouse paying support misses or falls short on a payment. Also, the borrower must present an agreement signed by both spouses, and some lenders require the judge’s signature as well.

At the early stages of a contested case, when a request for spousal support (alimony) orders has been made, it is very common for a judge to “reserve” on ordering spousal support. This means that they do not have enough information yet and will postpone the order to a later date.

In a collaborative or mediation process, couples often opt for the higher income earner to continue paying the bills (“status quo”) instead of paying support. This can be a costly mistake to the lower or no-income earner and, indeed, to the high-income earner spouse who wants off the loan.

Establishing an early support order/agreement can set both spouses up for success when it comes time to putting final agreements into place.

Important property tax considerations in a divorce

When entering a contested or mediated divorce, make sure to understand how California tax laws figure into property values.

  • Proposition 13 protects homeowners against escalating property taxes as the value of their property increases. Base year values cannot increase more than 2% annually, keeping the tax increase at a manageable level.
  • Proposition 60 and Proposition 90 allow qualifying sellers to carry their Proposition 13 tax base with them when purchasing a new property of equal or lesser value. Proposition 60 applies to properties within the same county, and Proposition 90 is for properties across counties in California.

Now, consider these laws as they apply in the following example:

Jason, 56, and Julia, 53, wish to sell their five-bedroom home on a large lot now that their children have grown up and moved away. They have lived in their current home for many years and the 1975 Proposition 13 base year value of $40,000 has only grown to $66,000 by 2002. Their property tax bill is approximately $700 per year.

Their home today is worth $400,000. Jason and Julia have found a townhouse with two bedrooms and no yard for $370,000, but they are unwilling to make the move because, under Proposition 13, this change of ownership will establish a new base year value, and their tax bill will jump from $700 to approximately $3,700 per year. They are on a fixed income and cannot afford the additional $3,000 per year in taxes.

To resolve this problem, Proposition 60/90 permits people over age 55 to sell one home and buy another of equal or lesser value within two years and take the Proposition 13 base value with them. Now Jason and Julia can move to the townhouse and still pay $700 per year in property taxes and incur increases no greater than 2% in the coming years.

How does Proposition 60/90 affect a high-asset divorce?

So why is this important in a divorce? Proposition 60/90 transfers can be used ONCE, and it cannot be divided between the spouses. The courts and, frankly, many divorce attorneys in California do not have this on their list of items requiring resolution.

In my 20+ years of practice, I have never heard a judge ask about, or make orders allocating, the tax base transfer. In recent years, California has seen a sharp increase in “gray divorces,” divorces among people who are at or near retirement age. Perhaps this issue rarely came up before since most divorcing couples did not meet the age qualification. That is not the world we live in today. And with the sharp increase in property values, this tax base carryover can be of significant value in high asset divorces.

What if you don’t discuss Proposition 60/90 during a divorce?

So, what happens if, in your contested, mediated, or collaborative divorce, this issue was not resolved or discussed? The first person to apply for the tax base transfer will get the transfer. It can take several months before the county updates the tax records to reflect a reduced/carried over tax base.

Oftentimes the ex-spouse will not know that his or her former spouse filed the application first until as late as the end of the year, or until they receive the rejection notice from their own transfer application, according to real estate agent Julaine Wagonner of ReMax College Park Realty.

These nuances can be easily missed, especially in a high conflict, protracted divorce, where the spouses just want to be done or don’t quite understand these complexities. It is always best to consult with a knowledgeable lender, loan broker or real estate agent who specializes in divorce matters to assist you and your divorce professionals.

Always communicate with your divorce lawyer to ensure that many of these items are resolved before you sign any judgment or make any requests for orders of the judge related to your real estate. Get the information from the experts to make sure your decisions are well informed and as complete as they can be. And, finally, get informed well before your trial date, preferably at the beginning of your divorce process (in mediation or collaborative, but also in litigation) to possibly complete it without ever setting foot in a courtroom to begin with. With the right planning and the right experts, you can complete your high asset divorce through a “win-win” agreement.

Related resources

About the author

Diana L. Martinez is a skilled High Asset Divorce Lawyer, specializing in collaborative divorce and mediation in California, with offices in Corona, Riverside, San Diego, and Newport Beach.

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