A Mediation Challenge: Should Divorcees Remain Co-Owners of Property?

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Equitable Distribution is an art.  Equitable Distribution is a complicated art comprised of multi-faceted complexities unique to each divorce.  It should be approached with an eye towards fairness and equity, not necessarily equality.  One of the most challenging (and most often encountered) items addressed in equitable distribution is the division of the marital residence.  Aside from its monetary value, the marital home often also carries with it substantial intrinsic value.  It is often the case that one spouse wants to retain residency in the marital home (with or without children), but is unable to afford its maintenance without the financial support from the other spouse.  That leaves the burden on the paying spouse, who is often the named individual on the mortgage, to continue to pay for a property in which he or she no longer resides and/or retains no ownership rights, pay alimony to the former spouse (though often taken as a credit towards the mortgage), and leaves the open-ended questions:  What if the residing spouse decides to cohabitate or remarry and loses alimony?  What if the paying spouse stops paying the mortgage?  What if ?  What if?  What if?  In mediated divorces, we look not only to the current issues (the actual division of the asset), but also to potential future issues (will the final agreement be sufficiently clear to avoid conflict down the road?)  The goal is to craft a document that clearly defines the intent of the parties today and in the future.

Step One:  Determine whether the marital home is an asset or a liability.

(a)    How much equity is in the home?

(b)    What is the fair market value today?

(c)    Does keeping this home equate to living above your means?

Step Two:  Determine whether the marital home is affordable by the spouse, who wants to retain ownership of the property.

(a)   Is the property affordable without the security of alimony payments?

(i)    If not, what are the contingencies in the event alimony is no longer available?

(b)   Is it an option for the residing spouse to buy-out the interest of the other spouse?  Refinance?

Step Three:  Evaluate the pros and cons of various scenarios relating to the disposition of the house, remembering to factor-in tax consequences and other possible liabilities.

(a)   Scenario A:  Keep the property (titled jointly in both names maintaining 50/50 ownership), and let one spouse continue to reside in the home.

(i)    Pros:  One spouse (and/or children) continues to reside in marital home, and avoid uprooting during emotional transition period.

(ii)  Cons:  Multitude of “what ifs” need to be considered and documented:

1. If alimony is being used by the spouse residing in property, what happens if spouse invites someone to “visit?”  Strict construction of language defining “cohabitation” will be required, triggering termination of alimony.  In that event, how will residing spouse be able to afford living in house?  Will this force a sale of the property?
2. If alimony is not being used by the spouse residing in the property, how will the deductions be tracked and reconciled at the time of the sale of the property?
3. Who is paying mortgage?  What if spouse stops paying the mortgage forcing foreclosure?
4. Who is paying for repairs and maintenance?
5. What is the duration of the “tenancy?” 

(b)   Scenario B:  Keep the property (titled jointly in both names maintaining 50/50 ownership) and rent it out as a source of income to both parties.

(i)    Mortgage and property tax payments to be shared equally, as well as maintenance and repair costs.

(ii)  Pros:  Creates a stream of income for both parties, tax benefits may be available, avoids forced sale of property during depressed real estate market conditions.

(iii) Cons:  Forces parties to become landlords, with all of the potential headaches associated with management of tenants, including possibility that the property will go unrented for periods of time.

(c)   Scenario C: Sell the property and divide the proceeds equally.

(i)    Pros:   Efficient, cost-effective, and equitable.

(ii)  Cons:  May be forced to take a loss on the asset.

Is It “Alimony/Spousal Support” or “House Payment?”

Remember, alimony/spousal support payments are considered as income to the receiving spouse for tax purposes (and conversely, a deduction for the paying spouse.)  Therefore, even if alimony is essentially merely a “wash” to cover the portion of the household expenses (mortgage, property taxes, repairs/maintenance), the receiving spouse may still incur a tax liability.  If there is no other source of income to this spouse, how will this be addressed?  If the payments are instead characterized as “house payments,” in an effort to avoid the triggering of a tax consequence, the enforceability for non-payment will become extraordinarily difficult.

The drafting of a property settlement agreement providing that one spouse will remain in the marital home, while retaining an ownership interest in the property is a complicated and complex task requiring attention to many details.  Among them, the following should absolutely be considered: 

• Who will reside in the property?
• Who will be responsible for the mortgage and tax payments?
• Who will be responsible for maintenance and repairs?
• Who will take the mortgage interest rate deductions on tax returns?
• Who will take homestead exemption?
• How will “big” repairs be handled?  Will there be an escrow account opened?
• What if one of the parties dies?  Will there be a life insurance policy to cover the costs of the property in the event of death?  How will an inheritance be distributed to the remaining heirs?
• What is the duration of the co-ownership?  When or what will trigger the sale of the property?
• If it becomes necessary, will the parties be able to refinance the property to allow one spouse to buy-out the interests of the other?

 In sum, co-ownership of the marital home post-divorce carries with it a number of challenges, requiring an extraordinarily detailed and carefully constructed settlement agreement seeking to address each and every “what if” situation and addressing all of the liabilities and benefits of property ownership.  A mediated Marital Settlement Agreement allows both spouses to think creatively and draft a document that meets their own personal needs.  One thing is certain:  the final document must be abundantly clear as to the intent of the parties today and thereafter.