MITIGATING TAX CONCERNS
WITH THE MARITAL HOME
DIVORCE
ISSUE 19, JULY 2024
REAL ESTATE & MORTGAGE JOURNAL
WWW.DIVORCELENDINGASSOCIATION.COM
04
05
HOUSING ASSISTANCE
TAX ACT
15
DOING IT RIGHT COSTS
LESS THAN DOING IT
OVER
18
3 MISTAKES TO AVOID WHEN
DECIDING THE FATE OF THE
MARITAL HOME
12
PROPERTY TRANSFER TAXES:
NAVIGATING THE FINANCIAL
IMPLICATIONS IN REAL ESTATE AND
DIVORCE
23
SPOTLIGHT INTERVIEWS
TABLE OF
PRESIDENT’S LETTER
DIFFUSING
ANCHORING IN
MEDIATION: A GUIDE
FOR DIVORCE
PROFESSIONALS
10
CONTENTS
The Value of Working with a Certified Divorce Lending
Professional (CDLP®)
A CDLP® brings the financial knowledge and expertise of a solid
understanding of the connection between Divorce, Family Law,
Financial and Tax Planning, and mortgage planning strategies
related to real property and divorce.
A CDLP® is trained to recognize potential legal and tax
implications of mortgage planning in divorce situations.
A CDLP® is skilled in specific mortgage guidelines as they pertain
to divorcing homeowners.
A CDLP® can identify concerns with support structures that may
conflict with mortgage planning opportunities.
A CDLP® works directly with the professional divorce team to help
implement a strategic divorce settlement agreement, ensuring the
best opportunities to secure mortgage financing after the decree.
A CDLP® can recommend financing strategies that help
divorcing clients identify mortgage planning opportunities for
maintaining the current marital home while helping to ensure the
ability to achieve future financing for the vacating spouse.
A CDLP® does not give legal or tax advice.
Divorce Mortgage
Planning Journal
Published by:
www.DivorceLendingAssociation.com
This for informational purposes only and
not for the purpose of providing legal or tax
advice. You should contact an attorney or
tax professional to obtain legal and tax
advice.
Copyright by
Divorce Lending Association, LLC
All rights reserved. No part of this
publication may be reproduced or
transmitted in any form or by any means,
electronic or mechanical, including
photocopying, recording, or by any
information storage or retrieval system
without the written permission from the
copyright holder.
The DLA is a national organization dedicated to bridging the gap
between the legal, financial, and emotional aspects of divorce and
the real estate and mortgage process, ensuring that divorcing
individuals have the knowledge, resources, and support they need to
secure their financial well-being and make confident decisions about
their housing needs.
What is the Divorce
Lending Association?
03 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
LETTER
PRESIDENT’S
Dear Colleagues,
I am thrilled to announce the launch of our new REM-S (Real Estate Mediation
Specialist) certification! This innovative program is designed to complement and elevate
the value of our esteemed Certified Divorce Lending Professionals (CDLPs), enhancing
the critical role they play in the divorce process.
Our CDLPs work tirelessly to provide specialized support and expertise, ensuring that
divorcing clients navigate their real estate and mortgage decisions with confidence and
clarity. The addition of the REM-S certification will further empower our professionals
by integrating advanced mediation skills with their already robust knowledge of divorce
mortgage planning.
This dual expertise not only improves the quality of negotiations but also ensures more
informed, equitable outcomes for all parties involved. The REM-S certification represents
our commitment to continuous improvement and our dedication to offering the highest
level of service to those we assist.
I also want to extend an invitation to our readers to become Allied Professional
Members. By joining, you can connect with a network of like-minded professionals
dedicated to advancing their practice and supporting divorcing clients through these
challenging transitions.
I hope you find the articles in this edition of the Divorce Mortgage Planning Journal both
informative and beneficial to your practice. Thank you for your hard work and
dedication to this essential field.
PRESIDENT & FOUNDER
04 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
While the Act provided much-needed relief and incentives for homeowners, it also introduced
complexities in the tax landscape, particularly concerning capital gains tax implications and
depreciation recapture risks.
These complexities arise in divorce, where one spouse moves into an existing rental property as their
primary residence and later sells the property. This article explores the Housing Assistance Tax Act of
2008, its impact on capital gains tax rules, and the potential tax risks for divorced spouses transitioning
rental properties into primary residences.
Overview of the Housing Assistance Tax Act of 2008
The Housing Assistance Tax Act of 2008 was a significant legislation with various provisions to
stabilize the housing market. Key components of the Act included:
Property Tax Deduction for Non-Itemizers: This provision allows homeowners who do not itemize
their deductions to claim a standard deduction for state and local property taxes.
Discharge of Indebtedness on Principal Residence: It excluded any discharge of qualified principal
residence indebtedness from income, providing relief to homeowners who had forgiven mortgage
debt.
Capital Gains Tax on Home Sales: Changes to capital gains tax rules for homes converted from
rental properties to primary residences were also introduced, affecting the tax treatment of gains
on the sale of such properties.
THE HOUSING ASSISTANCE
TAX ACT OF 2008
The Housing Assistance Tax Act of 2008 was
enacted to address the housing crisis that emerged
in the mid-2000s. This comprehensive legislation
aimed to stabilize the housing market, assist
homeowners facing foreclosure, and promote
homeownership through various tax incentives and
provisions.
AND POTENTIAL CAPITAL GAINS TAX RISKS IN DIVORCE
Written by Jody Bruns, President Divorce Lending Association
05 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
CAPITAL GAINS TAX RULES AND THE HOUSING ASSISTANCE TAX ACT
Under general tax rules, homeowners can exclude up to $250,000
($500,000 for married couples filing jointly) of capital gains from the sale
of their primary residence, provided they meet certain criteria. These
criteria include:
Ownership and Use Test: The homeowner must have owned and used
the property as their principal residence for at least two of the five
years preceding the sale.
·Frequency Test: The exclusion can only be claimed once every two
years.
However, the Housing Assistance Tax Act of 2008 introduced a critical
change affecting properties converted from rental to primary residence
use. Specifically, the Act established rules for non-qualified use periods,
which impact the exclusion of capital gains for properties not used as the
taxpayer’s primary residence for the entire period of ownership.
Non-Qualified Use Periods and Their Impact
A non-qualified use period is when the property is not used as the
taxpayer’s primary residence. For properties converted from rental use to
primary residence, the period of rental use before conversion is considered
non-qualified use. This distinction is crucial because it affects the
calculation of the capital gains exclusion.
When a property has periods of non-qualified use, the portion of the gain
attributable to the non-qualified use is not eligible for the exclusion.
Instead, it is subject to capital gains tax. The formula for calculating the
non-excludable gain is as follows:
Divorce Situations and Rental Properties
Divorce often involves the division of marital assets, including real estate. Sometimes, one spouse may
move into a rental property previously part of the marital estate and convert it into their primary
residence. This scenario raises important tax considerations, especially when the property is later sold.
06 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
What’s my property worth?
The two most common
methods for obtaining real
property value are obtaining
an appraisal or a CMA but
what’s the difference
between the two? The
primary difference is
perspective.
An appraisal is completed
by a licensed residential
appraiser who bases their
opinion of value on recent
comparable home sold sales
data.
A Comparative Market
Analysis (CMA) is
completed by a licensed real
estate professional who
bases their opinion of value
on what the property may
potentially sell for in the
current market.
John and Jane are divorcing. They own a property they have rented out
for the past ten years. As part of the divorce settlement, Jane moves into
the rental property, making it her primary residence. Five years later,
Jane decides to sell the property.
Step-by-Step Analysis:
Property History:
Rental period: 10 years
Primary residence period: 5 years
Total period of ownership: 15 years
Capital Gain Calculation:
Assume the property was purchased for $200,000 and sold for
$500,000.
Total gain: $500,000 - $200,000 = $300,000
Non-Qualified Use Period Calculation:
Non-qualified use period: 10 years (rental)
Total period of ownership: 15 years
Depreciation Recapture:
Assume Jane claimed $50,000 in depreciation deductions during the
rental period.
The $50,000 must be recaptured and taxed as ordinary income.
Non-Excludable Gain = (10 / 15) × 300,000
In this example, $200,000 of the gain is attributable to the non-qualified
use period and is subject to capital gains tax. The remaining $100,000 of
the gain may be eligible for the capital gains exclusion, assuming Jane
meets the ownership and use test requirements.
CONSIDER THE FOLLOWING EXAMPLE
07 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
WHY BECOME
AN ALLIED
PROFESSIONAL?
Together, we can make
a difference. Join the
DLA today and become
part of the solutions
for divorcing
individuals facing
complex financial
decisions surrounding
real property and
mortgage planning.
Amy Valdivia
Director of
Allied Professionals
Education.
Resources.
Community.
Nothing matters more in winning than getting the right people on the field. How are you
incorporating Divorce Mortgage Planning into your case management with a Certified Divorce
Lending Professional?
POTENTIAL TAX RISKS FOR DIVORCED SPOUSES
The Housing Assistance Tax Act’s provisions on non-qualified use periods introduce significant tax
risks for divorced spouses transitioning rental properties into primary residences. Key risks include:
Increased Capital Gains Tax Liability: Due to the non-qualified use period, a substantial portion of
the gain from the property sale may be subject to capital gains tax.
1.
Depreciation Recapture: Depreciation deductions taken during the rental period must be
recaptured and taxed as ordinary income, increasing tax liability.
2.
Complexity in Tax Planning: Accurately calculating the non-qualified use period and the
corresponding taxable gain requires careful record-keeping and tax planning.
3.
Impact on Divorce Settlements: The potential tax liability associated with the sale of converted
properties should be considered in divorce settlements to ensure equitable distribution of assets and
liabilities.
4.
Tax Rate Variability: Capital gains tax rates may vary based on the taxpayer’s income level,
potentially leading to higher tax liabilities for higher-income individuals.
5.
08 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
Divorced spouses can employ several strategies to mitigate the tax risks associated with converting
rental properties into primary residences:
Tax Planning and Advice: Engaging a qualified tax advisor to navigate the complexities of capital
gains tax rules and develop a strategic plan for property disposition.
1.
Use of 1031 Exchanges: Consider utilizing a 1031 exchange to defer capital gains tax by reinvesting
the proceeds from the sale into a like-kind property. However, this option has specific
requirements and may not always be applicable.
2.
Timing of Sale: Carefully timing the sale of the property to maximize the use of the capital gains
exclusion and minimize the impact of the non-qualified use period.
3.
Consideration of Deferred Maintenance: Investing in deferred maintenance and property
improvements may increase the property’s value, potentially offsetting some of the capital gains
tax liability.
4.
Comprehensive Divorce Settlements: Including provisions in divorce settlements to address
potential tax liabilities and ensure fair distribution of assets and liabilities.
5.
STRATEGIES TO MITIGAGE TAX RISKS
Emile’s journey into the world of divorce lending began with a commitment to helping
individuals make informed financial decisions during one of the most pivotal moments of their
lives. As a CDLP®, Emile specializes in assessing the financial intricacies of divorce, including
property division, refinancing, and mortgage qualification. This specialized knowledge allows
Emile to provide tailored advice that aligns with each client’s long-term financial goals.
What sets Emile apart is not just technical proficiency but a deep-rooted dedication to client
education and empowerment. Emile’s approach is holistic, considering both the emotional and
financial well-being of clients. By offering clear, actionable insights and fostering open
communication, Emile ensures that clients feel supported and informed throughout the
process.
For anyone facing the daunting intersection of divorce and homeownership, Emile Flowers
stands out as a trusted advisor, guiding clients toward secure and equitable outcomes with
professionalism and compassion.
Read
more
about
Emile
at
https://www.divorcelendingassociation.com/offices/emile-
flowers.cfm
The Housing Assistance Tax Act of 2008 introduced critical changes to capital gains tax rules
that significantly impact divorced spouses converting rental properties into primary
residences. Understanding these rules and their implications is essential for effective tax
planning and risk mitigation.
Divorced spouses must carefully consider the potential tax risks of selling converted properties
and employ strategic planning to minimize their tax liabilities. By engaging qualified tax
advisors, utilizing tax deferral strategies, and incorporating comprehensive provisions in
divorce settlements, individuals can navigate the complexities of capital gains tax rules and
make informed decisions about their housing and financial futures.
09 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
Introducing Emile Flowers, CDLP®
Emile Flowers, a Certified Divorce Lending Professional (CDLP®), is
making significant strides in the field of divorce mortgage planning. With a
comprehensive understanding of the complexities involved in divorce and
real estate, Emile brings a unique blend of empathy and expertise to the
table, ensuring that clients navigate this challenging period with confidence
and clarity.
Understanding Anchoring in Mediation
Anchoring typically occurs early in negotiations when one party makes an initial offer or demand that
unduly influences the mediation process. For example, if one spouse demands an unrealistically high share
of assets, this figure can set a precedent, making any subsequent negotiations revolve around this inflated
value rather than a fair assessment of the assets.
The Impact of Anchoring
Skewed Negotiations: Anchoring can cause the negotiation process to skew heavily in favor of the party
who sets the initial anchor, often leading to imbalanced settlements.
Emotional Distress: When one party feels the anchor is unfair, it can lead to increased emotional
distress, resentment, and a communication breakdown.
Prolonged Mediation: Anchors can prolong the mediation process as parties struggle to move past the
initial figures and reach a mutually acceptable agreement.
Strategies to Diffuse Anchoring
As a divorce professional, there are several strategies you can employ to mitigate the effects of anchoring
during mediation:
Set Clear Guidelines: Before mediation begins, set clear guidelines and expectations. Explain the
potential pitfalls of anchoring and encourage both parties to focus on equitable outcomes rather than
initial positions.
Use Objective Data: Introduce objective data and benchmarks early in the process. These can include
financial statements, property appraisals, and legal precedents. Grounding the discussion in factual
information can reduce the influence of arbitrary anchors.
Encourage Open Communication: Foster an environment where both parties feel comfortable expressing
their concerns and needs without resorting to extreme positions. This can help prevent the establishment
of unreasonable anchors.
Diffusing Anchoring in Mediation: A Guide for
Divorce Professionals
10 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
Mediation is crucial to achieving amicable settlements in
the often emotionally charged divorce process. However,
one psychological phenomenon that frequently hinders
productive negotiations is anchoring. Anchoring refers to
the cognitive bias where an individual relies heavily on an
initial piece of information (the "anchor") to make
subsequent
judgments
and
decisions.
For
divorce
professionals, understanding and effectively diffusing
anchoring can significantly enhance mediation, leading to
fairer and more equitable outcomes for both parties.