A Divorce And A House Worth Less Than The Mortgage

(MCT)

Here’s one of the most difficult modern-day dilemmas: a couple in divorce proceedings who owe more on their house than it’s worth. What to do?
Some advice from Daniel Green, a divorce lawyer in the Westport office of Begos Horgan & Brown LLP:

Get an accurate opinion about what the house is really worth – Green suggests bringing in a professional such as an appraiser or local realtor to get a non-biased estimate of the market value of the home. “If the house is ‘underwater’ or worth less than the mortgages on the property you’ll need to approach the mortgage holder about the possibility of a short sale or a mortgage modification. Both of these processes take several months, so start this process early in the divorce process so that a meaningful strategy can be formulated,” he says.

Understand the changing tax implications – In days gone by, if a couple were selling their home as part of resolving a divorce, they had to consider how the taxes on the gain on the sale would be handled. Often, they would try to re-invest the realized gain on the home to minimize the tax consequences. Today, it’s a matter of dealing with the tax implication of a cancelled debt. “With so many homes of divorcing couples being underwater, the issue today is about dealing with the tax liability for forgiveness of debt. There could be a significant tax burden when the bank settles a million dollar mortgage with $600,000 at this closing,” says Green.
In the past, when mortgage debt was cancelled through a foreclosure, short sale or otherwise, the cancelled debt was treated as income to the debtor. But, for some couples, that may no longer be true. “In December 2007, Congress passed the Mortgage Forgiveness Debt Relief Act. Under the Act, it may be possible for a married couple filing jointly to exclude from their taxable income $2 million dollars of mortgage debt if it were cancelled between 2007 and 2012,” says Green. “The relief is available only for borrowed funds that were used to buy, build or improve the individual’s principal residence. This is called Acquisition Debt. Relief is not available for home equity debt that was used for other purposes, like buying a boat, taking a trip to Tahiti, or for any purpose that is not within the definition of acquisition debt.
“That means that divorcing borrowers will have to produce records establishing how they used the mortgage funds that have evolved into cancelled debt in order to take advantage of the Act.”

Couples may also be able to avoid income tax liability for debt that is cancelled if they file for bankruptcy. Also, if they are insolvent (i.e. their total debts exceed the fair market value of their assets), they may be able to avoid the harsh consequences of tax liability for cancelled debt.

Consider keeping the house – In the past, it was common for one member of a divorcing couple to stay in the house with the children and the other to relocate to a new residence in the same general area. Given today’s economy, the first reaction may very well be to move out of a home that no one can afford. But Green says that may not be the best course of action. It means the couple would have to get two new residences as well as absorbing two moving expenses. It also means that one parent has to find a new home that would allow the children to stay in the same schools. Also, the couple has to find two places that are close enough to allow for the frequent or shared physical custody. Many couples find that renting or buying two places in their affluent community actually turns out to be more expensive than maintaining the one former family home.

In such situations, it may pay to hold onto the family home, even if it is underwater. The hope is that you can negotiate an agreement with the lender on a more affordable mortgage modification. In addition, if one of the divorcing parents can keep the house afloat until the real estate market improves, a subsequent sale of the appreciated home might release some of the financial pressure.

Understand that selling even the above-water house today is more complicated – Even if there’s equity in a home, selling it today is more complicated. Today’s lenders have sustained some pretty significant losses. As a result, they’ve become more conservative in their lending practices. Potential buyers who once would have had no problem qualifying for a mortgage, may find they no longer can satisfy the stricter requirements for down-payments or income.
“Once-burned-twice- shy banks now take much longer to approve loans to borrowers who would have qualified for loans in the blink of an eye in the past,” says Green. “The bottom line is that sellers may have trouble finding qualified buyers and may encounter significant closing delays even when they find qualified buyers.”

Prepare your home and yourself for the market – Prospects for attracting a buyer are enhanced when the home is made attractive to the general public. This may involve “staging” the property. This is modifying it to attract a wide variety of buyers. There are professionals who do this or you can go to www.homebuyinginstitute.com/staging to get some advice.
California interior designer and home stager Beryn Hammil (www.bhammil.com) also writes about staging in her blog. One of the easiest “fixes” she and other stagers recommend is removing personal items (family pictures etc.) in favor of a clean, organized look. Your Realtor will have other tips that allow people to more easily envision themselves living in your home. That Realtor will also be your best resource to make sure you price the home realistically. “In my practice, I’ve seen many divorcing couples hurt themselves by setting a listing price on homes they need to sell at a price they would like to realize, rather than at a price that the market will bear,” says Green.