Negotiating a divorce settlement is stressful even under the best of circumstances. Real property owned by the couple (such as the marital residence) is often part of the negotiation. Knowing how to obtain a fair, impartial and accurate assessment of the value of real estate is integral to the process. Once the value is determined, there are many options available for the distribution of the property. The choice of options depends on the priorities of the parties and the economic situation of each family.
In determining the value of the marital residence, here are ten important factors to keep in mind:
- If the house is going to be sold in the near future, the best way to determine fair market value is the actual sales price rather than an appraisal. If there is disagreement about the listing price, it is helpful to obtain an appraisal.
- The method for the appraisal should be agreed upon in advance. For example, the parties may each obtain a formal appraisal by a certified appraiser or the parties may elect to obtain an informal appraisal. Another option is to use a neutral appraiser.
- If you and your spouse agree to use a neutral appraiser, who will communicate with the appraiser and what will be said should be agreed upon in advance to ensure the neutrality of the appraiser. It is not necessarily important to disclose that the appraisal is for the purpose of divorce.
- Make sure to use a state certified and licensed real estate appraiser who is familiar with your local market.
- Most real estate appraisals are based on comparable sales. You and your spouse should be confident that the homes used for comparable sales are similar to your property. Another factor is whether the sales are recent. The appraiser will also evaluate whether there are any special features about your home that make it more valuable and/or if the condition of your home makes it more or less valuable than the comparable sales.
- The property value as assessed by the municipal authority for tax purposes is not necessarily a reliable indicator of fair market value.
- Once the fair market value of the marital residence (or other property) is agreed upon, the amount of any mortgages or home equity lines of credit need to be subtracted to determine the equity in the property.
- If there is going to be a buyout, how will the seller (person transferring his/her interest) be removed from the mortgage? What is the time frame for doing so?
- Another factor to consider is whether there is a separate property claim by one or both or the parties that would affect distribution of the property. Separate property is property that was acquired prior to the marriage, gifted or inherited. This issue can be complicated and it is best to discuss separate property claims with your attorney.
- Capital gains taxes should also be considered. If at some point you sell your property for more than you paid, there may be capital gains taxes payable after the exclusion is applied. This issue must be considered in determining whether there will be a buyout or even if there is a sale to a third party. Making use of the exclusion available to both parties should be discussed.
- List the property for sale and the parties can divide the proceeds after all costs are satisfied;
- Agree to sell the property at a future date; until that future date, one party may remain on the property or the parties may agree to lease the property to a mutually agreed-upon lessee;
- One party keeps the property and the other party is bought out or credited for his/her respective share;
- One party remains on the property and pays rent to the other party to satisfy the debt.
When parties work together in divorce, it is more likely that the ultimate resolution creates maximum value. Having a judge make the decision takes away the parties’ ability to come to an arrangement that may be better for their unique set of circumstances. In most cases, the parties benefit by settling the matter out-of-court provided each party has competent, experienced counsel who can explain the legal and practical effects of possible solutions.