When couples own expensive real estate and other complex assets, divorce takes on an added level of stress and complexity. Before negotiating any settlements or turning over matters to the judge, it is essential for both spouses to understand the realities regarding mortgages, property taxes, and other issues that can affect their living arrangements and financial situation in the short and long term.
An attorney experienced in handling high net worth divorces should be aware of the issues, but you need to ensure that your attorney is willing to take the time to review those critical details with you so that you can make the right informed decisions for your future.
Be Prepared for Buyout Arrangements
In many divorce situations, both spouses want to keep the family home or a beloved vacation property. They may become so adamant that it can be difficult if not impossible to have a rational discussion on the subject. This is understandable because properties like these carry intense emotional value as well as financial value.
However, when a quick resolution is forced by a judge or the need to finalize the divorce, parties often make decisions without considering the practical consequences. Often, they agree that one spouse will buy out the other’s interest in the property without reviewing the logistics of the arrangement. Even when parties have substantial wealth, the transaction can be very difficult, particularly when one spouse earns less income than the other.
Be Aware of Income Requirements to Qualify for a Loan
Whether you are in a contested divorce or you are working together in a mediation or collaborative divorce process, if you own real property and both spouses are on the mortgage, odds are that at least one spouse will need to qualify for a new loan. This might involve refinancing to remove the other spouse from the loan and paying them their share of equity interest, or it could involve taking out a loan to purchase a new home.
Many divorce judgments require the spouse keeping the home to refinance the loan 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 generally require proof of six consecutive months of income in order to establish eligibility for a new mortgage—and a refinance situation establishes just that. To qualify for the mortgage on a jumbo loan, a homeowner may need to demonstrate 12 consecutive months of income, depending on the lender. Conforming loan limits vary from county to county across California.
How Alimony Affect Loan Applications
The loan application is very likely to be denied if a spouse is using spousal support (aka alimony) to qualify for the loan and the spouse paying support has ever missed or fallen short on a payment. Also, when a borrower is relying on alimony to meet income requirements for a mortgage, the borrower must usually present an agreement signed by both spouses, and some lenders require the judge’s signature as well. When a spouse obligated to pay support applies for a mortgage, those obligations must be factored into their mortgage situation as well.
Establishing Arrangements Early Can Make the Process Easier Later
At the early stages of a contested case, when a spouse puts in a request for alimony, it is very common for a judge to “reserve” on ordering spousal support. This means that the court does not yet have enough information to make a decision so the ruling will be postponed to a later date.
In a collaborative divorce or mediation process, couples often agree to have the spouse with higher income to continue paying the bills, maintaining the status quo during the divorce proceedings instead of paying support. This can be a costly mistake. It is better for both spouses to have an order for support established early on because it will make it easier for the spouse receiving support to qualify for a mortgage, and that will get the other spouse’s name off the mortgage obligation sooner.
Important Property Tax Considerations in a Divorce
Whether a divorce is contested or congenial, both spouses need to understand how California tax laws figure into property values and how tax obligations will affect them going forward. For instance, 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. Propositions 60 and 90 allow qualifying older 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 while Proposition 90 is for properties across counties in California.
To understand the effect these provisions can have on a divorce situation, it is helpful to review how the rules apply to a couple who are remaining married compared with a couple who are divorcing.
Example A – Empty Nesters Who Want to Downsize
Couple A wants 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 Proposition 13 base year value of $40,000 has only grown to $66,000. Their property tax bill is approximately $700 per year.
They found a townhouse with two bedrooms and no yard for a price is a little less than the value of their home. However, under Proposition 13, the change of home would establish a new base year value, and their tax bill would jump from $700 to approximately $3,700 per year. They do not want to pay an additional $3,000 per year in taxes. Fortunately, Propositions 60 and 90 permit people over age 55 to sell one home and take the Proposition 13 base value with them so long as they purchase a home of equal or lesser value within two years . Now Couple A can move to the townhouse and continue to pay only $700 per year in property taxes with increases no greater than 2% in the coming years.
Example B – Empty Nesters Who Want to Divorce
Couple B owns a home that has appreciated in value but retained the same tax obligations as Couple A. They agree to sell the house and divide the equity equally. However, one spouse buys a new home before the other and uses the provisions of Propositions 60 and 90 to transfer the property tax to the new home. That spouse continues to pay property taxes of only $700 per year. When the second spouse buys a home, the transfer opportunity has been used up, so that spouse must pay property taxes of $3,700 per year.
California Property Tax Issues are Often Overlooked in Divorce
The transfer permitted under Propositions 60 and 90 can be used only once. Moreover, the opportunity and resulting benefit cannot be divided between the spouses. This can lead to tremendous inequality following a divorce, but it is an issue frequently overlooked by couples, their attorneys, and the courts.
It is rare for a judge to ask about, or make orders allocating, the tax base transfer. Perhaps this issue rarely came up in years past because many divorcing couples did not meet the age qualification. However, in recent years, California has seen a sharp increase in “gray divorces” among people who are in their 50s or older. With the steep increase in property values, the tax base carryover available to those 55 and over can be of significant value in high asset divorces.
What Happens If You Don’t Discuss Propositions 60 and 90 During a Divorce?
If the tax transfer benefit offered in Propositions 60 and 90 is not resolved or even discussed in your divorce, then the first person to apply for the tax base transfer will get to use this benefit. It can take several months before the county updates the tax records to reflect a reduced/carried over tax base.
Oftentimes a divorced individual will not know that their former spouse filed the application first until the end of the year, or when they receive the rejection notice from their own transfer application.
The Details Matter When it Comes to Real Estate in a California Divorce
If you fail to plan properly, you could end up unable to buy a home or facing tens of thousands in extra property tax in the future. The details that lead to these consequences are missed far too often, especially in high conflict, protracted divorce situations where the spouses just want to be done or don’t quite understand all the complexities of the situation.
When you work with a knowledgeable divorce attorney, they can consult lenders, loan brokers, real estate agents, and other professionals to ensure that you will emerge from the divorce positioned to move forward and not backward.
Check with your divorce lawyer to ensure that these issues are resolved advantageously before you sign any judgment or make any requests for orders 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. You need accurate information well before your trial date, preferably at the beginning of your divorce process. With the right planning and the right experts, you can complete your high asset divorce through a “win-win” agreement that will not lead to unpleasant surprises in the future.
Holstrom, Block & Parke, APLC Protects the Full Range of Your Interests in Divorce
When your future is at stake, it is important to work with a legal team you can trust to manage the big picture and the details that have such an impact on your future. At Holstrom, Block & Parke, APLC, our team provides the benefits of over 300 years of collective experience so that we can protect your interests throughout the divorce process. Call Holstrom, Block & Parke APLC today at 855-426-9111 or contact us online to schedule a consultation with a divorce lawyer who understands real estate issues in Southern California.