With the recent downturn in the economy, people are feeling insecure about their jobs, their bank deposits, their credit card balances, their retirement account values, and most of all, the plummeting real estate market.
Real estate in general, and the family residence in particular, are proving to be more of a challenge these days to divorcing people. The house that was worth 40% more two years ago may be difficult to sell in a market where loans are harder to qualify for, even at a reduced price. With the double incentives of low interest rates and mortgage interest deductions, many people borrowed against their equity in the past few years to fund new cars, vacations, increased lifestyle, and business start-ups. Because they used their homes as surrogate ATM machines, these families experienced shrinking home values which may have left them with little or no remaining equity. This puts an added burden on a divorcing couple, because selling the family home and buying two smaller homes may no longer be feasible. Therefore, it is even more important to talk to a family law accountant to weigh several options.
One of the thorniest issues in a divorce may be who gets to stay in the family residence, for how long, and who gets bought out. Especially when there are children involved, but even if there are not, a couple in a collaborative practice or mediation case may find ways to compromise with the help of their team. One possible solution may be for one parent to remain in the home with the children for a few years for a period of adjustment, or for enough time for the children to complete the next stage of their education. We can help the couple work out a deferred sale and/or buyout a few years in the future. The current tax laws allow us to make this plan work if, and only if, both parents agree.
Selling the house and dividing the proceeds may not be the optimum solution, particularly during a poor real estate market. More divorcing couples are continuing to live in the same residence, albeit with creative partitioning. Some are remodeling the house in order to create separate kitchens, bedrooms and bathrooms for each spouse. If the property may be subdivided and/or zoning variences are approved, a duplex or "granny house" may be created.
Calculating each spouse's portion of the equity may be a challenge. Did one of the spouses own the home prior to marriage? Were there capital improvements made during the marriage? Was the original loan refinanced? If so, how often? Was cash taken out of the equity? Did one spouse go on title during the marriage? If not, was a quit claim signed? If so, why? Was the signer aware of the ramifications of signing away his or her interest in the real estate? These issues involve complicated calculations for potential reimbursements and equity-splitting that a family law CPA can assist with. Of course, these are legal issues as well.
In a collaborative practice or mediated case, this type of information is more readily available, because both spouses have pledged to cooperate, and to be honest and forthcoming with the details necessary to make a fair and equitable determination of the equity split. This cooperative attitude goes a long way toward saving the couple considerable time and money in compiling the information and coming to an agreement with the assistance of the neutral account and their attorneys or mediator.
The collaborative and mediation processes recognize that one spouse may need a little more help understanding the financial issues and making decisions as to whether or not he or she can affort to stay in the family home and for how long. The accountant may meet alone with him or her to review potential options and budget for the near future.
These are some of the reasons that working with a neutral family law accountant in the collaborative or mediation process helps the divorcing couple talk about and resolve their financial and tax issues faster, better, and cheaper. If you or a friend or family member are considering divorce, we invite you to contact us soon.
Signed, Susan Carlisle, CPA/PFS ABV, CFF
http://www.carlislecpa.com/
