How to handle large sum of $ from divorce settlement?

[recall]

Hey folks, thanks in advance for any and all advice. Here's the sitch:

My wife and I are divorcing and have reached an agreement outside of court (thank god) wherein she's buying me out of our property for $120k. What do I need to know before making this transaction in terms of mitigating tax loss, or income bracket or ???

I'm a self-employed musician/designer/artist and my income last year was about $25k.

Please help!

Thanks so much

[secondcor521]

@spartana is correct on the tax treatment.  The $120K you're receiving is just to equalize the property division, so it's not income.  It was already your (joint) property in the form of your home equity.

What you probably should be concerned about is if there is a mortgage on the house for which you are liable (you probably are).  Even if you get divorced, even if you sign a quit claim deed, and even if there is divorce paperwork saying she's responsible for the mortgage...you're still on the hook for the mortgage.  This is because the mortgage is a contract between you and the mortgage company and they don't care about your marital status or a side agreement you have with your soon-to-be ex-spouse.  So if she stops paying (happens sometimes; divorces can be rough financially), then you face two bad choices:  (a) pay the mortgage on a house you don't own, or (b) allow her non-payment to wreck your credit.

The typical solution to this is to require her to refinance the property.  I'd personally insist on her refinancing into a mortgage in only her name before signing either the quit claim deed or the divorce agreement.  Sometimes people say "Oh, we'll give them X years to refinance" and put terms to that effect in their divorce agreement.  I would not trust an ex-spouse that much personally.

Oh, and tax-wise if your divorce is finalized this year then you'll file as single, not MFJ, next April.  With your income it's probably not much of an issue.

[yachi]

@spartana is correct on the tax treatment.  The $120K you're receiving is just to equalize the property division, so it's not income.  It was already your (joint) property in the form of your home equity.

What you probably should be concerned about is if there is a mortgage on the house for which you are liable (you probably are).  Even if you get divorced, even if you sign a quit claim deed, and even if there is divorce paperwork saying she's responsible for the mortgage...you're still on the hook for the mortgage.  This is because the mortgage is a contract between you and the mortgage company and they don't care about your marital status or a side agreement you have with your soon-to-be ex-spouse.  So if she stops paying (happens sometimes; divorces can be rough financially), then you face two bad choices:  (a) pay the mortgage on a house you don't own, or (b) allow her non-payment to wreck your credit.

The typical solution to this is to require her to refinance the property.  I'd personally insist on her refinancing into a mortgage in only her name before signing either the quit claim deed or the divorce agreement.  Sometimes people say "Oh, we'll give them X years to refinance" and put terms to that effect in their divorce agreement.  I would not trust an ex-spouse that much personally.

Oh, and tax-wise if your divorce is finalized this year then you'll file as single, not MFJ, next April.  With your income it's probably not much of an issue.

I would have thought a requirement to meet the guidelines to be sold to Fannie Mae or Freddie Mac would require mortgages to deal more gracefully with divorce decrees.  Sadly you're right secondcor521, you can be kept financially responsible for a property over which you have no property rights!

In addition to selling and refinancing, there is sometimes another option.  It's called a mortgage assumption.  FHA, USDA, and VA loans are almost always assumable - it usually requires the lender putting the buyer through a mortgage underwriting process.  A benefit of assuming a mortgage is you can continue with the original balance at the original loan terms, so if interest rates have risen sharply, you can keep an old, lower, interest rate.

[PDXTabs]

The typical solution to this is to require her to refinance the property.  I'd personally insist on her refinancing into a mortgage in only her name before signing either the quit claim deed or the divorce agreement.  Sometimes people say "Oh, we'll give them X years to refinance" and put terms to that effect in their divorce agreement.  I would not trust an ex-spouse that much personally.

I think that where I live it is normal to put refi language into the divorce judgement to refi within a few months of the judgement being final. I'm not a lawyer and that's not legal advice.

[secondcor521]

The typical solution to this is to require her to refinance the property.  I'd personally insist on her refinancing into a mortgage in only her name before signing either the quit claim deed or the divorce agreement.  Sometimes people say "Oh, we'll give them X years to refinance" and put terms to that effect in their divorce agreement.  I would not trust an ex-spouse that much personally.

I think that where I live it is normal to put refi language into the divorce judgement to refi within a few months of the judgement being final. I'm not a lawyer and that's not legal advice.

The problem with doing things this way is that the ex-spouse who obligates themselves to refinance the house may not do so for any number of reasons.  Interest rates go up or they lose their job or get a pay cut or they take on other debt and can't qualify.

The only recourse at this point that I know of for the other spouse (OP in this case) with any teeth at all is to move for contempt of court, which could be costly, time consuming, irritating to both parties, and probably annoy the judge as well.

Then what?  Ex-spouse comes into court, shares their sad story with the judge, says they're trying but they're having a hard time right now.  Judge either (a) tells the parties to work it out in mediation, (b) overrides the decree and gives them more time, or (c) finds them in contempt and fines them or puts them in jail, or (d) something else.  In none of those cases is the house refinanced.

I'm also neither a judge nor a lawyer, but I did go through a divorce once with a house and a mortgage involved.

[PDXTabs]

I'm also neither a judge nor a lawyer, but I did go through a divorce once with a house and a mortgage involved.

Me too, I don't recommend it. The other thing that is normal is to put a lien on the house until the other spouse gets their refi money. Because most people don't have six figures for a cash award just sitting around.

But I wouldn't refi you off the house unless I knew the rest of the deal was rock solid, either because a judge signed the judgement or because we went to trial and put it on the record.

[secondcor521]

I'm also neither a judge nor a lawyer, but I did go through a divorce once with a house and a mortgage involved.

Me too, I don't recommend it. The other thing that is normal is to put a lien on the house until the other spouse gets their refi money. Because most people don't have six figures for a cash award just sitting around.

But I wouldn't refi you off the house unless I knew the rest of the deal was rock solid, either because a judge signed the judgement or because we went to trial and put it on the record.

Yeah, it's a dicey period of time.  The good bit of advice I was given is to treat it like a business transaction with someone who no longer particularly likes you.  Be reasonable, but protect your (and the kids') interests.

We ended up selling our home during the divorce process, which took care of the house and the mortgage.  We split the net proceeds and my ex bought a house (with a new mortgage I'm guessing) with her half before the divorce was final.  For some reason she and her lawyer asked me to sign a quit claim deed to her new house, which I was fine doing.  For purposes of asset division, we just put her half of the house proceeds on her side of the ledger and ignored her new house and new mortgage.

I ended up buying a house shortly after the divorce was final.  I needed to have a better picture of what my finances would look like, especially the child support payment.  I think I also wanted to not have to deal with quit claim deeds etc.

[PDXTabs]

I'm also neither a judge nor a lawyer, but I did go through a divorce once with a house and a mortgage involved.

Me too, I don't recommend it. The other thing that is normal is to put a lien on the house until the other spouse gets their refi money. Because most people don't have six figures for a cash award just sitting around.

But I wouldn't refi you off the house unless I knew the rest of the deal was rock solid, either because a judge signed the judgement or because we went to trial and put it on the record.

Yeah, it's a dicey period of time.  The good bit of advice I was given is to treat it like a business transaction with someone who no longer particularly likes you.  Be reasonable, but protect your (and the kids') interests.

We ended up selling our home during the divorce process, which took care of the house and the mortgage.  We split the net proceeds and my ex bought a house (with a new mortgage I'm guessing) with her half before the divorce was final.  For some reason she and her lawyer asked me to sign a quit claim deed to her new house, which I was fine doing.  For purposes of asset division, we just put her half of the house proceeds on her side of the ledger and ignored her new house and new mortgage.

I'm really glad that both sides were reasonable in your case. Also, I agree. My first wife and I managed to do the whole thing without lawyers.

[BigEasyStache]

@recall
Check the quit claim laws for your state.  Here in Louisiana, where I did one many years ago, the person giving up ownership is no longer liable after 5 years.  But those first 5 years can be scary.