As part of the divorce negotiations an agreement is usually reached or ordered by the court about whether to sell the marital home and split the profit in some equitable manner or for one spouse to buy the other spouse out. The same would hold true for any investment properties, especially if they are considered “community property.”
However if the home is “negative in equity” or is worth less than what is owed, then it is typically in the best interest of both spouses to sell the house as a short sale. The other alternative would be for one of the spouses to continue making the mortgage payments or both spouses to share the mortgage payments and wait to sell the home until the market improves enough that there will be some equity in the home so it could be sold at a later time. Timing the market for a future sale is difficult at best and as with any other homeowners who are “upside down” on their mortgage payments, it may create a severe financial burden and stress on either one or both spouses.
Living together during a divorce or legal separation because of a home that has negative equity is not usually in the best interest of the spouses or the family. A reasonable alternative would be for one spouse to live in the house and make the payments, which can be financially draining and not always the best decision. The other alternative is toshort sell the house, have any remaining mortgage debt forgiven by the lender, so that in approximately two years, each of the spouses can purchase a home of their own.
Thankfully for many short selling homeowners, the government’s “homeowner forgiveness act” has been rolled over for another year until December 31, 2014 which prevents homeowners who short sale their homes from having to pay taxes on the amount of forgiven debt.
In the years prior to this act being passed when a person short sold, loan modified or had a foreclosure, the amount of loan debt forgiven was taxed similar to a “gift tax”. This is another reason why it is risky to wait to sell a home with negative equity until a future time. We do not know if the “homeowner forgiveness act” will be rolled over for another year after December 31 2013 or if the IRS will start forcing homeowners to pay taxes on the difference between the amount that the home sold for and the amount of debt that was owed on the home and forgiven by the lender.
The short sale of the home can be part of the divorce agreement just as any other type of home sale. The divorcing homeowners should carefully choose a real estate agent who is very experienced in negotiating short sales. In my opinion it is usually best if the spouses interview the agent together or if that is not possible then they should both interview the agent at different times.
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