Complications (Five Examples)
Once the provisions of the divorce have been decided, circumstances may change, but the provisions rarely do. It is important to get it right the first time. To illustrate the point that issues lurk behind every asset, we leave you with examples of some common complications and just some of the details they might raise (it is beyond the scope and ability of this article to fully present options and ramifications):
Divorce Complication: The Family Home
For many families, the family home probably makes up the bulk of the real value in your marital estate. For that reason, it may also be the most contentious asset.
When a home is considered a marital asset, the choices for a divorcing couple are to sell the house, have one spouse buy out the equity of the other spouse, trade the equity for other assets, or keep it in the family for a longer period (until the children are grown or a spouse remarries, for example). Whatever is being considered, the starting point would be to get an appraisal of the home's current value from a real estate agent or appraiser. To arrive at the home's equity, the outstanding mortgage balance, costs of the sale, and any liens should be subtracted from the appraised amount.
At this point, the couple might decide to sell the house to a third party, where both spouses would share the commission and sales expenses, and split the proceeds.
One spouse may keep the home by buying out the other's interest. This can be done through a buy-sell agreement, by trading off other assets equal in value or by refinancing (assuming there is some equity) and using the equity funds to pay off the former spouse. The buy-out would likely require negotiation and multiple appraisals. A reasonable compromise is possible with some effort and lots of cooperation. Naturally, the buyer would benefit from a low appraised value and the seller would prefer a high one. After two, the couple could agree upon a value in the middle, or move on to a third appraisal. Unfortunately, only an actual sale sets the value of a home.
Further, and not surprisingly, the IRS may want a piece of the action. A home sale could have capital gains tax implications. Capital gains taxes trigger in two common ways: when selling a home less than two years from the purchase date or when realizing a gain (profit) of more than $250,000 from the initial purchase price. IRS Publication 523 explains the tax rules that apply when selling a home. The publication can be downloaded from the IRS website.
Again, we caution you that whatever strategy you and your spouse work out with respect to your home, it would be wise to consult with a qualified attorney, CPA, and/or other relevant professionals before signing your property settlement. This is no terrain for the intrepid novice.
The information above is only a snapshot of the potential problems and is not full disclosure. Even if you and your former spouse agree with the split, it still pays to run the arrangement by your own counsel to conform to the laws of your state or the fairness of your split.
For the Five Complications:
Divorce Complication: Stock Options
Divorce Complication: Retirement Plans
Divorce Complication: Bankruptcy
Divorce Complication: Debts
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