What are the pitfalls to this idea?

10 years ago

My mom and her husband are going through an amicable divorce. It was suggested that because they have so much equity in their current home, they should take out a second mortgage and use that money to buy her a new home. (The husband is keeping the current home.) Then, when the divorce is final, she'd sign off on "his" house. Her house would be done in her name only from the start. The 50/50 division of assets is more than enough to cover the cost of her new house.

Do you see any money-related or tax pitfalls with this plan?

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Comments (9)

terezosa / terriks
10 years ago
Yes, there is a pitfall with this plan, assuming the current house has a mortgage. Your mother can sign away her ownership in the property, but will still be on the hook for the mortgage. Her soon to be ex will have to take out a new mortgage in his name only to relieve her of the liability.
rrah
10 years ago
So she will be responsible for paying the new mortgage?

And as mentioned above, her name will still be on the original mortgage.
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lyfia
10 years ago
Her husband will need to take out a new mortgage and get her off any current mortgage along with then giving her the portion of the money she should have.

Here in TX this was no issues doing at all when I had to do this to get my ex off the property as the market was down at that time and we couldn't sell. I didn't need to give him any money through. I was just stuck with a house I didn't really want/need at the time.
folkvictorian
Original Author
10 years ago
Thank you for your answers!

Yes, he's applying for a new mortgage in his name only and the deed will be signed over by mom to him at the end of the divorce finalization. Her house will be in her name only and his will then be in his name only.
liriodendron
10 years ago
Hmmmm,

I would certainly think about it carefully as it may have (state and federal income) tax repercussions. A married couple has a larger protected whack when it comes to capital gains tax than a single person on transfer of real property. It sounds like she's proposing to quit claim her interest to him, but she can't assign her share of that tax protection. And if he's buying her interest out, even if little cash is exchanged because the bulk of the division of marital assets is in the form of equity in the new house, it can get complicated. What may need to happen is a slightly different transfer between them in order to fully use her capital gains tax protection while she can, and give him a stepped-up basis after the transfer. I am definitely not a lawyer, but it might be better for both of them to sell the property to him, not just use a simple release of the ownership interest from one to the other.

Definitely recommend a competent tax and divorce lawyer review, in order to not leave any potential asset unrealized (by either parrty), nor leave an unexpected tax bill when the properties are eventually sold at some time in the future.

Depending on their ages, there also might be issues with a seemingly below market property disposition if one or other needs Medicaid assistance to cover nursng home care at some point soon.

Adding a lawyer to an otherwise amicable divorce can seem counter productive. But one can make it clear that the lawyer is just there for tax and legal expertise, not advice on how to maximize one person's share of the property division.. This stuff can be tricky. But it shouldn't cost a lot to just get this kind of problem-avoiding and problem-solving advice.

HTH

L.
mjlb
10 years ago
Of course, you need an attorney. But in general, "No gain or loss is recognized for transfers of property from an individual to a spouse or a former spouse incident to a divorce. Code Section 1041."

"The transferor's basis for the transferred property is carried over to the transferee. A transfer to a former spouse must occur within one year after the date on which the marriage ceased, or must be related to the cessation of the marriage."

This beneficial treatment applies only to US citizens and resident aliens.

source: 2013 CCH US Master Tax Guide
sweet_tea
10 years ago
If they want to go forward with such a plan, he shouldn't put the newly purchased house in her name only until the divorce is finalized. Just like she isn't going to sign over her portion of the marital home until the divorce is finalized. Both homes should stay jointly owned while they are married and both homes should switch to single owner at the same time. This is only fair.

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To be honest, the while idea of getting her a new home before the divorce is finalized is unwise.

Why doesn't he just take out (during refinance) her half of the equity of existing home and give it to her as a lump sum payment when the divorce. is finalized?? This would be the same time that she signs off on the divorce papers. Then she takes her 50% equity money and buys her own house. Then she has a clean break from him.
lyfia
10 years ago
I think it is a good idea to resolve all of it before the divorce and then spell out who gets what in the divorce decree. That way there is no issues coming up late about the refi/appraisals and no dings on credit that could affect things. Since this is an amicable divorce.
brickeyee
10 years ago
If things depart from "amicable" before the divorce is final it may not go the same way.

What are the pitfalls to this idea?

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terezosa / terriks

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What are the pitfalls to this idea?

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