Strategies to co-own the family residence after divorce.
by Alan Nobler, Emeritus
Not every divorce leaves the ex-spouses at war. In Mediation and Collaborative Practice, we frequently will have couples who, regardless of whatever circumstances drove them apart as mates, remain committed to a cordial relationship for the benefit of co-parenting their children. They recognize they will remain in a relationship with their children for the rest of their lives and the better that relationship is, the more likely that all of their life cycle events can be shared with a minimum of drama.
A key piece of every divorce is what to do with the family residence. Does one parent keep it, giving up other assets in exchange for the equity in the house? Does it get sold? In many divorces today there is not enough money for a parent to keep the house, buy out the other parent, and have enough liquid assets to be secure that any hiccup in the economy won’t lead to catastrophic consequences. So, a partnership agreement is forged to allow for co-ownership of what is usually the largest asset in their estate.
I like to think of this as if the parents are owners/partners in a rental property. This is a business! The agreement with the parent who will remain in the house takes on many of the aspects of a lease. What follows is a list of considerations that must be discussed for inclusion in their written agreement:
- Exclusive right to occupy: leases provide that the landlord cannot come and go as they wish; there are specific limitations on the landlord’s right to enter the property. A parent staying in the family residence should be entitled to the same consideration. How will this affect visitation? How do you envision this working?
- Term: how long will this agreement last? There may be serious tax consequences if the term will extend beyond a few years. For instance, there is currently up to $500,000 of capital gains tax exclusion for a couple who sells their residence. $250,000 of that might be lost if the out-parent remains out beyond a specified period, leaving only $250,000 of exclusion available. What happens when the term is up and the in-parent does not want to leave? What will constitute grounds for an unlawful detainer action? What if the in-parent remarries or moves a significant other into the residence? What about renting out a room?
- Basic finance: who pays the mortgage(s), taxes, utilities, repairs, and insurance? Who gets the deductions. What if either parent fails to timely make payment [of [his/her] share] on [the/an] encumbrance and the holder files a notice of default or otherwise takes action to make recourse to the security
- Capital repairs: capital repairs are generally the larger items paid for by an owner and not a renter. Do you define the repair by type (roof, foundation, re-pipe) or by a dollar level of expenditure that may cover a broken toilet tank cover, but not replacing a stove. Would there be a source of funds to make capital repairs? How would it be funded?
- Borrowing: the out-parent may want to purchase their own residence. If their capital is tied up in the family residence, can they borrow against that residence to generate sufficient capital for a down payment on their own residence? Must the in-parent cooperate? What kind of penalties would you consider to insure performance?
- Right of first refusal: when it comes time to sell, should one of the ex-spouses be able to buy the property? Will there be any discounts given? What if it is already listed? The right of first refusal may affect the willingness of a Realtor to become involved in listing the property. If a Realtor faces the prospect of marketing a property, only to have it withdrawn from the market, how would compensation be figured?
- What happens if the residence is condemned, totally destroyed, or destroyed to such an extent that it is not economically feasible to repair.
- How to set a sale price: if the in-parent does not want the property sold, what power will they have to insist on a price so far above market that it can’t be sold?
- What system would be used to resolve any conflicts that arise once the agreement is put in place.
- What list would be complete without a number 10? I’m sure each person looking at this will come up with something that pertains to their situation that has not been included here. This is not an exclusive list, but a starting place for your conversation(s) and new ideas.
The conversation around these topics may require more than a few minutes. It may take more than a few meetings. The couple will have to reconcile many conflicting personal interests while keeping their eyes on the prize: preserving some stability for their children. They will have to continue with meetings periodically to make sure their business remains operational. It also gives them a great opportunity to model mature behavior for their children and build their own skills. Not surprisingly, one parent may believe that sacrificing their own financial stability is the right thing to do for the short term benefit of the children – even when the children may do just fine moving into another residence as long as there is a lessening of the conflict that has ultimately led to the divorce.