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Divorce Tactics and Deferring the Sale of the Family Residence in this Depressed Real Estate Market

Divorce Tactics and Deferring the Sale of the Family Residence in this Depressed Real Estate Market

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The collapse of the real estate market and economy is forcing divorcing couples to consider a deferred sale of their family residence. A review of the considerations provided in this article may alleviate the unnecessary loss of the family residence and promote a successful division of this community asset.

Attorneys, Mediators, Coaches and Collaborators are considering delay in the division of the family residence as an important option for divorcing couples. Children are able to remain in the same home, neighborhood, schools and church, and are impacted by the divorce less severely than if they are uprooted from these familiar attachments. Drastic economic circumstances in the real estate and job markets have created an inherent interest in deferring the sale of the family residence independent of the obligation of support.

Couples are looking at retaining ownership of their family residence, so that it can hopefully be sold for a profit in the future, and to stabilize the lives of their children. The parties are considering negotiating a reduction in the amount of the mortgage with the bank to reflect the fair market value of the residence, and to avoid a foreclosure proceeding. Or, one of the parties may need time to acquire the ability to purchase the other party’s community interest in the home, and the parties agree to make an arrangement to accomplish this goal, and to avoid the costs of a listed sale, to eliminate a capital gains tax, and to allow one party to continue to be a real estate owner when it may otherwise be problematic for that party to qualify to purchase a new residence.

The immediate sale of the family residence may be deferred by the court, when requested by a party, so that the custodial parent and minor children could continue to live in the family residence as part of a child support order. The parents own the home as tenants in common until there is no need for child support and the home can be sold and the proceeds divided between them. Marriage of Boseman (1973) 31 CA3d 372, 107 CR 232; Marriage of Duke (1980) 101 CA3d 152, 161 CR 444., and Marriage of Braud (1996) 45 CA 4th 797, 811, 53 CR2d 179, 187, footnote 14 traces development of FC Section 3800 et seq.

Family Code Section 3800 governs the deferred sale of a family home. For purposes of Section 3800 et seq., a “deferred sale of home order” means an order that “temporarily delays the sale and awards the temporary exclusive use and possession of the family home to a custodial parent of a minor child or child for whom support is authorized…, whether or not the custodial parent has sole or joint custody, in order to minimize the adverse impact of dissolution of marriage or legal separation of the parties on the welfare of the child.” (Family Code Section 3800(b). Hogoboom and King, Cal. Prac. Guide: Family Law (The Rutter Group 2009) 6:543.

A party must request a deferred sale of the family residence. (FC Section 3801(a). The character of the family home which qualifies for application of a deferred sale of home order can be a community property asset, mixed asset, or even the separate property of the non-resident or out-spouse (party living out of the family home), who is the child support obligor.

The statutory scheme does not expressly state deferred sale of home orders are made for a child support purpose. However, Section 3800 et seq. is placed in Division 9 of the Family Code dealing with “support.” The “statewide uniform child support guideline” (Family Code Section 4050 et seq.) itself brings deferred sale of home orders into the child support equation, i.e., the formula amount of support, may in the court’s discretion, be adjusted downward to the extent the rental value attributable to the non-occupant spouse’s (support obligor’s) ownership interest exceeds the mortgage payments, homeowner’s insurance and property taxes. Hogoboom and King, Cal. Prac.Guide: Family Law (The Rutter Group) 6:546.

When a party requests a deferred sale of home order, the court must determine whether “it is economically feasible” to maintain the (1) house payments (mortgage, property taxes, and insurance) during the deferred sale period, and (2) the ability of the resident spouse (in-spouse) to maintain and preserve the condition of the home comparable to that at the time of trial. The Code requires an “economic feasibility” determination, the intent is (a) to “avoid the likelihood of possible defaults in secured note payments (mortgages, equity lines and other liens), and a resulting foreclosure;” (b) to “avoid inadequate insurance coverage;” (c) to prevent deterioration in the condition of the home; and (d) to “prevent any other circumstances which would jeopardize both parents’ equity in the home.” Family Code Section 3801(a), see Marriage of Braud, supra.

After the threshold economic factors are satisfied, then the court retains broad discretion to grant or deny the order. A deferred sale is never mandatory. There are 10 statutory factors, which the court is required to consider and weigh. Marriage of Stallworth (1987) 192 CA3d 742, 746-750, 237 CR 829, 831-834, Marriage of Braud, supra, and Family Code Section 3800 et seq., Hogoboom and King, Cal. Prac. Guide: Family Law (2009) 6:551-585. Family Code Sections 3802(b)(1) – 3802(b)(10)

  • First, the length of time the child has resided in the home.
  • Second, the child’s placement or grade in school, and how much longer would the child be likely to attend a neighborhood school.
  • Third, the accessibility and convenience of the home to the child’s school, other facilities used by the child, and available to the child, including child-care.
  • Fourth, whether the home has been adapted or modified to accommodate any physical disabilities of a child or a resident parent in a manner such that a change in residence may adversely affect the ability of the resident parent to meet the needs of the child.
  • Fifth, the emotional detriment to the child associated with a change in residence.
  • Sixth, the extent to which the location of the family residence permits the resident parent to continue his or her employment.
  • Seventh, the financial ability of each parent to obtain suitable housing should the family residence be immediately sold and the proceeds divided.
  • Eighth, determining the tax consequences to the parents, and the requirement for a reservation of jurisdiction for the maintenance of the home and tax consequences.
  • Ninth, determining the economic detriment to the nonresident parent in the event of a deferred sale of home order. A deferred sale might interfere both with the out-spouse’s ability to acquire suitable housing for “frequent and continuing” contact with the children (FC Section 3020) and with the ability to “get on with living his or her life in a post divorce world. Marriage of Stallworth, supra, 192 CA3d at 748,749, 237 CR2d at 833. Whether to award an off-set against the child support liability for out spouse’s loss of use of his or her separate property family residence. Marriage of Braud, 45 CA4th at 815, 53 CR2d at 189. The court could compensate the out-spouse by making a condition for the deferred sale on the parties’ obtaining a loan with which the out-spouse could cash out all or part of his or her community interest with a view to overall economic feasibility for each party. Marriage of Braud, supra, footnote 18, dictum.
  • Tenth, any other factors the court deems just and equitable. Marriage of Braud, supra. Footnote 15. For example, the out-spouse’s separate property interest in the home may be a just and equitable factor to consider in deferring the owner’s occupancy/sale of the home or in limiting the term for the deferred occupancy/sale.

The order deferring the sale of the family home must specify its duration. FC Section 3803.

This determination is akin to the weighing process on the issue of whether to grant a deferred sale of home order, and, generally, not when the child reaches the age of 18 years! When the children are going to naturally be changing schools should be considered. Marriage of Stallworth, supra, 192 CA3d at 748, 237 CR at 833, Marriage of Braud, supra, 45 CA4th at 816, 53 CR2d at 190, affirmed an order deferring the sale of the home for 12 years, until the youngest child reached age 18. A deferred sale of home order may also be made for adult children owed a support obligation (…”or child for whom support is authorized,” Family Code Section 3800(b)).

The court has discretion to modify or terminate a deferred sale of home order when circumstances change, unless the parties have otherwise agreed in writing. FC Section 3807. Should the resident party remarry, or there is a change in circumstances affecting the FC Sections 3801 or 3802 determinations upon which the order is based or affecting the economic status of the parties or the children on which the order is based, there is a rebuttable presumption affecting the burden of proof that further deferral of the sale of the family residence is no longer an equitable method of minimizing the impact of dissolution or legal separation on the children, then the court can require an immediate sale and division of the proceeds. Family Code Section 3808. Consequently, when the parties actually desire a fixed deferral period, they must document that intent in a written agreement, to avoid the court’s discretion to vary the term.

Not governed by FC Section 3800 et seq. would be a deferred sale of the family residence for property division purposes. A deferred sale of the parties’ community property home strictly for a property division purpose is not a deferred sale of home order governed by Section 3800 et seq. of the Family Code. Marriage of Stallworth, supra, 192 CA3d 742, 748, 237 CR 829,833 provides that where “economic circumstances warrant,” courts have discretion to delay the division of an asset, giving one party interim exclusive use until it can feasibly be sold and the proceeds divided.

More recently, economic circumstances have created an interest in deferring the sale of the family residence independent of the obligation of support. The deferral of the sale of the family residence may be an independent integral part of the division of the community property.

Attorneys, Mediators, Collaborators and Couples are looking at protecting their investment in the family residence as well as considering their children’s welfare. The statutory scheme does not preclude deferred sale orders on whatever terms and conditions are stipulated to by the parties. The deferred sale of home order can be a significant negotiating point. Marriage of Braud, supra, 45 CA4th at 816, 53 CR2d at 190, footnote 18. Couples are looking at retaining ownership of their family residence, so that it can hopefully be sold for a profit in the future, and at the same time to stabilize the lives of their children. The parties are considering negotiating a reduction in the amount of the mortgage with the bank to reflect the fair market value of the residence, and to avoid a foreclosure proceeding. Or, one of the parties may need time to acquire the ability to purchase the other party’s community interest in the home, and the parties agree to make an arrangement to accomplish this goal, and to avoid the costs of a listed sale, to eliminate a capital gains tax, and to allow one party to continue to be a real estate owner when it may otherwise be problematic for that party to qualify to purchase a new residence.

When the parties agree to consider a deferred division of their family residence, they should review and consider the following:

Record a new Deed identifying each spouse as a Tenant in Common as to an undivided one-half interest each. There are two very important reasons to convert the title to Tenancy in Common: (1) This form of title allows for each party to include and dispose of their community property share of the asset as they wish in their estate planning, and (2) it protects each party’s undivided one-half ownership interest from becoming an asset of the bankruptcy estate under the jurisdiction of the bankruptcy court should one of the parties file for protection from creditors in a bankruptcy proceeding during the joint ownership. Marriage of Stallworth, supra, 192 CA3d at 747, 237 CR at 832, footnote 2. In the context, where the parties have a mixed asset family home. The out-spouse has made a substantial separate property down payment. The parties should consider awarding him or her a percentage ownership interest. The separate property share and the community property shares of the deferred sale proceeds will include appreciation and depreciation in the value of the home during the deferral period. To effect this result, the reformed deed will recognize the parties as tenants in common as to an unequal ownership interest. The one party with the separate property/community property interests, and the other party with a community property interest, set forth on the deed, and with language providing for payment of the sales proceeds in the unequal proportionate amounts. Or, if there is a buy-out option, then to calculate the proportionate interest when determining the net buy-out amount. Marriage of Braud, supra, 45 CA4th at 821, 53 CR2d at 194 and footnote 25.

Provide for the exclusive use, possession and control of the family residence by one of the spouses. The party who is living permanently in the home is the in-spouse or resident spouse. The other party is the out-spouse and may retain the right to come to the residence for parenting duties, maintenance or repairs on the property, all subject to advance notice to come to the residence, unless to implement the defined parenting plan. The parties may mutually agree on how to share the possession of the residence, including keeping the possession exclusive to the resident spouse. Or, the spouses can choose to alternate exclusive possession of the family residence defining their shared exclusive possession. For example, the parents alternate one-week intervals in the home. This has been referred to loosely as “bird nesting.”

Under current tax law, the out-spouse can continue to consider the deferral of $250,000 of gain on the family residence so long as this residence continues to be the primary residence for the out-spouse, and in spite of the exclusive possession of the family residence by the in-spouse. This is a limitation to be considered by the out-spouse. He or she is unable to own another primary residence, until after the sale of this family residence to preserve the ability of the out-spouse to apply the $250,000 exclusion against gain on the sale of the family residence. For purposes of the IRS Section 121 exclusion, the out-spouse is treated as using the property as his or her principal residence during any period of ownership that the other spouse is granted use of the property under a divorce or separation instrument. IRC Section 121(d)(3)(B)

The parties shall determine support and the obligation to maintain the principal, interest, taxes and insurance connected to the family residence. This arrangement can create a mutual tax advantageous situation, whereby the in-spouse pays the mortgage and taxes, and the out-spouse pays family support to resident spouse. The in-spouse must include the family support as income for the annual income tax return, and the out-spouse deducts the payments from gross income for the annual income tax return. The in-spouse will write-off the deductible interest and real estate taxes from the family support received to reduce the total amount of income on the annual income tax return. The parties may review this approach with a C.P.A. to maximize the mutual income tax benefit of using family support. Family support is unallocated combined spousal and child support, and is fully deductible provided that it meets all of the requirements for spousal support deductibility. The obligation to pay family support must terminate on the supported spouse’s death. IRC Section 71(b)(1)(D) No part of the family support payment can be fixed as child support, or reduced or terminated on a contingency related to a child. IRC Section 71(C)(1) and IRC Section 71(c)(2)(A). Or, the parties can use a more traditional Guideline approach to support, and make any mutually agreed adjustments for the principal, interest, taxes and insurance, which will mutually benefit the parties.

The parties should compare and contrast the monthly fair rental value of the home against the monthly cost of the loan principal, loan interest, taxes and insurance (PITI) amount. If the PITI payments are greater than the fair rental value, then consider options for sharing these expenses. For example, the out-spouse may make the tax payment and write-off this expense on the annual income tax return, or share a percentage of all the expenses, and take the appropriate expense for income taxes where appropriate. The amount equal to one-half of the difference between the monthly Fair Rental Value and the PITI could be deducted from the support each month or deferred and reimbursed out of escrow on sale, or as a credit for the buy-out formula. The parties may meet with a C.P.A. to find the best tax appropriate assignment of these payments with a consideration for the use of family support, assigning dependents, and other support options. Or, the in-spouse may delay a monthly reimbursement to compensate for the monthly overpayment of the PITI compared to the monthly fair market value to be paid out of escrow on the sale of the family residence, or as part of the buy-out formula instead of a listed sale.

If the monthly fair rental value is greater than the monthly PITI payment, then the amount equal to one-half of the difference could be added to support or deferred and reimbursed out of escrow on sale or as part of the calculation for a buy-out formula, or as a deduction to the monthly support. See Family Code Section 3806, Marriage of Stallworth, supra, 192 CA3d at 749, 237 CR at 834. Whether to grant a net fair rental value offset against child support lies within the discretion of the court. Family Code Section 4057(b)(2).

Define the term of the tenancy in common? The parties may have a “look and see” approach for the rapidly changing value of the real estate market during the joint ownership. The parents may consider continuity and consistency for the children based on their ages; or to allow a child to complete their education at the same school; and to allow a child to complete an activity in the neighborhood. The parties may agree to provide additional time to allow one party to develop the ability to pay for the other party’s community interest in the home in a “buy-out” arrangement for division of the family residence. They may need the time to provide for the opportunity to negotiate with the bank to define and work out a new loan, which more accurately reflects the current market value of the home in lieu of a foreclosure action. It may be that one of these topics, or a combination of these topics, will drive the couple to consider deferring the division of the family residence. A very important consideration for the parties is that when one of the parties would not be able to qualify to buy a home on the open market, but would be able to purchase the other party’s interest in the family residence in a reasonably short period of time, and thereby become a home owner by arrangement between the parties. The ability to have this opportunity also will benefit their children by promoting the consistency and continuity of living in the family residence, keeping the same neighborhood friends, schools, and church.

The in-spouse will maintain the property in the same condition as when the Marital/Mediated Settlement Agreement is signed subject to normal wear and tear. The parties may consider hiring someone for the maintenance of the landscaping or pool. The Out-spouse may be on a defined schedule to provide some maintenance service at the family residence that had been provided in the past, and is desired by the parties to continue until the home is divided. The parties may wish to factor the cost of these services in the support analysis, or as a reimbursement to be paid out of escrow on sale or as part of the buy-out formula calculation. The parties may elect to reserve jurisdiction on the issue of maintenance. This is mandatory under Family Code Section 3809 when the court is requested to make a deferred sale of home order.

The maintenance and repair expenses can be shared by mutual agreement to be defined between the parties. For example, the In-spouse will take care of all repairs and maintenance items that cost less than $200, and the parties shall share equally the cost of repairs and maintenance above $200 by mutual agreement. If one spouse is financially unable to contribute to the repair and maintenance costs as required, then the other spouse shall pay and be reimbursed out the escrow sales proceeds, or as otherwise decided by the parties, or as a factor in the buy-out formula, so that the residence can be maintained and repaired when required.

The parties shall be able to sell their family residence at any time by mutual agreement. This provides the parties with the greatest latitude to deal with unforeseen circumstances so that their interest in the property is protected.

Define what will happen in the case of a party’s death? This may Trigger a right of first refusal for the surviving party to purchase the decedent’s interest from the estate of the decedent, or if finances are slim and it would serve the children’s interest, then impose upon the estate of the decedent the specified term defined by the party’s in their Judgment for Dissolution of Marriage for the sale of the home to maintain the continuity and consistency in the daily lives of the children. If the out-spouse is the survivor, the Agreement should shift the exclusive right of possession of the home to the out-spouse, as well as, the obligation to keep the payments in connection with the family residence current until divided between the survivor and the estate of the decedent, or until a buy-out of the estate’s community interest in the family residence by the survivor parent, as provided for in the Agreement.

When the in-spouse remarries or cohabits this usually triggers a sale, or right of first refusal to buy­-out the other party’s community interest in the home. If there is a buy-out option, you can define that the parties will obtain a joint appraiser to obtain a fair market value, and then the parties can define the allowable deductions from the fair market value to complete the formula. The “buy-out” formula should be defined by the parties in their Agreement. Or, the party’s may consider a modification of the support payments or shared expenses. See Family Code Section 3808.

Capital improvements to the family residence may be required during the tenancy in common ownership, and how these costs shall be shared can be defined by mutual agreement. When one party is financially not able to contribute and the capital improvement is necessary or approved by mutual agreement, then the other spouse can pay for the improvement and be reimbursed out of the escrow sales proceeds, or as a factor in the buy-out formula, or by any other mutually defined method.

What if a spouse loses their employment during the tenancy in common? This event may trigger an immediate listing and sale of the family residence, or trigger the right of first refusal to buy-out the other party’s interest in the home, and/or create a new reimbursement claim should one party make payments for the other obligated party related to the family residence mortgage principal, mortgage interest, other encumbrances, taxes, insurance, maintenance, or repairs. Further, can the parties create a security device for this loss of income to get the house payment made in a timely manner should the obligated party lose his or her job.

A right of first refusal can be arranged by the parties to coordinate the buy-out of other party’s interest in the family residence when a certain mutually defined event occurs (remarriage, loss of employment, ability to qualify for a loan, the term of the deferred ownership expires). If the party with right of first refusal does not elect to buy, then the parties may provide a second right to buy-out the first party, if the first party does not elect or does not qualify to buy-out the other party’s interest, then the second party will be provided a short-time period to exercise his or her right to purchase the residence before it is listed for sale. This buy-out approach avoids the loss of funds paid for costs of a listed sale and potential capital gains tax. It allows children to remain in the same neighborhood, schools and church. It may provide a unique and rare opportunity for one spouse to be a homeowner.

Is there natural disaster protection? If the home has substantial equity, then the parties should consider insurance, or become aware of the availability and cost of earthquake coverage to protect the community equity in the home. The cost for this protection should be considered as part of the overall support scheme, and as a potential expense to be shared by the parties, or as a payment to be reimbursed on sale or buy-out.

What if the party with exclusive possession of the residence vacates the premises? If the in-spouse chooses to vacate the family residence, the Agreement should provide that this act is defined as a substantial change in circumstances. One of the options includes allowing the out-spouse the ability to take-over exclusive possession, and how would this affect the current payment of support and obligations in connection with the family residence. This may require a mutual meeting with a C.P.A. to adjust payments and support and to maximize income tax credits. The parties may agree that when the in-spouse vacates the family residence, that an advance written notice would be required to be made to the out-spouse, and that this may trigger a listed sale or buy-out of the in-spouse’s community interest in the family residence by elected option.

When the in-spouse rents a portion of the family residence, the parties may decide how to treat that rent income by mutual agreement. The parties may wish to preclude the ability to rent a portion of the home, unless by mutual agreement as to the identity of the renter, amount of rent, and how to divide the rent income, and disclose the rent income for annual income tax filing.

 

 

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