Despite permit issues and small salary, refi could keep payments affordable

Ilyce R. Glink
Inman News

Q: My husband and I are on the brink of divorce. He has agreed to let me keep the house in exchange for me not making any claims against his military retirement pay. We have about $200,000 in equity in the house, which is located in Virginia’s Washington, D.C., suburbs. I have two areas of concern.

First, the title and mortgage are in both our names. I understand it will be easy to get his name off the title, but I may have to refinance the mortgage to get his name off that. I don’t want to do that for two reasons. The loan is at 5.25 percent interest, and payments will most certainly go up. My salary is considerably less than my husband’s. I cannot afford higher payments, nor am I confident the mortgage company will approve a refinance in my name only.

Do you have a suggestion on how to approach this situation?

Second, we have made extensive renovations to the home, including finishing the basement (which included installing plumbing fixtures and tapping into the county sewer system). Against my vehement protests, my husband found a contractor willing to do everything without county permits for the work.

I am now concerned that if I decide to sell the home, that I will face large fees and possible removal of some of the work. I am fairly confident it was done up to code — the contractor, despite agreeing to do the work without a permit, is otherwise well known and reputable and seemed to know the requirements.

I love this house and have many friends in the neighborhood. I don’t want to lose it, but I’m not sure how to handle the real estate situation in the divorce settlement. Thank you for your advice.

A: You need to talk with a qualified divorce attorney who can mediate this situation for you and give you the appropriate guidance. But here are some initial thoughts:

First, you cannot take your husband off of the mortgage unless you refinance. The good news is that interest rates are dropping now, and you can get a 15-year loan at less than 5 percent, and a 30-year mortgage below 5.5 percent. That’s not too far off of where you are now, and presumably you’ve paid down some of your original loan, so if you refinance on what’s left your payments will fall.

But if you take the house, you’ll be cash-poor. What will you do about your retirement? Will you sell your beloved house and move when you are older in order to have the cash? Will you use a reverse mortgage to help fund your retirement? I’m not sure you’re thinking clearly about the situation.

One mistake women often make is thinking that $200,000 in equity is the same as getting a share in a pension or retirement account cash. It is not. You may think you’re agreeing to a 50/50 split, but it’s really more like 35/65 with you getting the short end of the stick.

I understand your emotional connection to the house, and to the idea that you need to have something stable when everything else is falling apart. But too many women keep the house and forego other cash and are left with an illiquid asset (particularly now, when property values have declined dramatically in many parts of the country) and broke. I’d hate to see you in that situation.

You and your husband should probably sell the house and then you can rent or buy something more affordable in your neighborhood. I wouldn’t agree to give up a claim to future retirement benefits until you’ve spoken with a financial planner and thoroughly understand what that means to your financial situation (both today and in the future).

Again, you need a really smart divorce attorney and financial planner to help you through these times and to work the numbers so that you get the maximum benefit possible.

The Backstory: After I e-mailed the answer to this letter-writer, I heard back from her. She said that she has a good government pension and some other retirement cash in the bank and wasn’t worried as much about funding her retirement as I was. She has decided to try to refinance in the wake of today’s super-low interest rates and keep the house.

Q: My husband “inherited” a house last November when his mother passed away.

Several years ago, his mother put him on title to the house so that when she became incapacitated or passed away he would automatically get the house through right of survivorship.

His mother’s plan was for him and his sister to either keep the house if one of them needs it to live in, or sell it and split the proceeds 50/50. If my husband sells the house and gives 50 percent of the proceeds to his sister, is he personally liable for capital gains based on the total sales price (since he is now the sole owner)? Or, is there some way to divide up the liability?

A: If your mother-in-law put your husband on the title to the house, then he received a half-ownership in the property at that time. He received the property at his mother’s cost basis. When she died, he either received the other half (if they were joint tenants with rights of survivorship), or half of her half (the other quarter going to his sister, if that was the disposition according to the will).

Let’s assume that he owns it all at the moment. If his mother bought the property for $100,000, when she put him on title, he received his half at that price point. If the property was worth $300,000 the day she died, he received the other half at that stepped-up basis — at that value.

If he sells the property for $300,000, he would owe long-term capital gains tax on his original half of up to 15 percent plus state tax. He’d owe nothing on the half he inherited from his mom. (Now you see why it’s so much better to inherit rather than give someone real estate.)

Unfortunately, there is no way to divide the liability, other than simply paying the tax from the proceeds of the sale and giving his sister a little less than half.

If your husband weren’t a nice person, he could easily exclude his sister from any share in his mother’s estate (although his mother didn’t want this, but that’s the way she set up her estate).

The only way around any tax liability is if you and your husband move into the property as your primary residence for two years. Then, any profits you receive up to $500,000 on the sale of the property will be yours to keep tax-free.

You should sit down with an accountant to discuss what has happened and what options you have to help follow-through on your mother-in-law’s wishes.

Copyright 2008 Ilyce R. Glink

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