Divorce, State Laws, Retirement, Reverse Mortgages
Posted by: Michelle Odessey, in Reverse Mortgages, Retirement, Divorce, GeneralBelow is an email I received a couple days ago from one of our subscribers and I wanted to share my response to her and see what your comments were too.
From: Ami Gomez
Sent: Thursday, May 17, 2007 4:20 PM
To: Michelle@InvestorWealth.com
Subject: Case Scenario
Hi Michelle,
First, thank you for the valuable info I’m receiving from you via email. I’m gaining knowledge and wisdom from it being an investor.
I’d like to ask for advice on exit strategy on this scenario:
My Uncle is 70 years old, Retired from Navy and Civil Service
Assets: Home worth $700,000 paid off (Bought at $46,000)
Savings/Checkings/CDs: $40,000
Fixed Annual Income: $40,223
His wife of 49 years wants a divorce, currently in process. Wants to get half share of the community property. So, here’s the debating question: Sell or Hold the fully paid off home?
1) If Sold, pay taxes on capital gains and remainder will be split in half.
2) Hold and just “buy-out” the wife half worth of the property. To do this, he would cash-out equity on the house of $350,000. This would create a fixed mortgage payment the next 30 years.
My Uncle prefers #2 as he is attached to the home he lived for a very long time. He plans to rent out rooms to help him in house payment.
The property is in “Silicon Valley” located in Sunnyvale, CA. The housing market is a little slow right now, and to sell quickly may need to bring the price down. He’ thinking to sell the house within the next 5 years.
What formula or analysis I should do to help him decide what is best. Would appreciate any counsel you can give.
Thank you.
Ami
+++++++++
Ami,
FIRST, Let me preface ALL that I am going to write here by saying:
I am not a financial advisor.
I am not an estate lawyer.
I am not a divorce lawyer.
I am not a divorce arbitrator.
I am not a marriage counselor.
I do not have the ear of your uncle.
I do not know where his heart is in relation to is soon to be X-wife
I do not know how long they have been married.
I do not know what the California marriage/divorce laws are.
. . . . etc.
So with all that said:
Does he have a good divorce lawyer?
He obviously has been in that house a very long time!
What are the marriage property laws in the State of California.
Does he HAS TO GIVE HER HALF - [which I gotta tell you, A GOOD divorce lawyer would be able to handle this AND I do not know (maybe I don’t want to) WHY they are getting divorced].
If he has to give her half - DOES HE HAVE A FINANCIAL ADVISOR that could talk to him about the benefits of a reverse mortgage. Some people do this to make sure their older relatives have both the $ to sustain themselves AND stay in their home - using the equity in their home NOW. BIG NOTE HERE, IF is has a good divorce lawyer and a good financial advisor (I can recommend a very good one who also understands ’successful’ real estate investing [Financial Solutions (251) 625-8885] ) THIS TOO can be a way to protect your uncle’s retirement base that he has in his home.
Ami, there is more to consider, but I would definitely start right there at the ‘HEART’ of the matter.
Please let me know how it works out!
Best Best,
Michelle
Entries (RSS)
May 30th, 2007 at 8:18 pm
Ami,
Several things to consider:
The $$ going to the wife would be less than 350K; you should deduct all closing & selling expenses and taxes (fed & state cap gains) even if property is not sold - then split in half.
If he takes a mortgage on the property - he will have to pay approximately 12 - 15K in interest alone - he cannot afford this.
Taking in roomers is a really difficult decision when you have been living with the same person for 49 years - it sounds good - but is not really that good.
If he is thinking of selling in 5 years - tell him to sell now and move into a 55+ active community - he will probably meet a “second mrs. right”.
Mark
Marksub123@yahoo.com
February 6th, 2008 at 9:34 am
It may be too late now to help Ami’s Uncle with his dilemma. As a divorcee near his age and living on a fixed military pension and a social security check I can relate to this situation. So I’d like to offer a few thoughts that haven’t been addressed here yet.
First, California is a community property state. There is a good discussion about community property here: http://californiadivorce.info/legal.property.communityvsseparateproperty.htm
To summarize, both the Uncle and his wife are equal owners of every marital asset – the house, the cars and toys, the savings/checkings/CDs, and the fixed annual income, including his/hers retirement incomes.
The ex-wife may have a legal claim to half of the Uncle’s military pension as marital property. Under my divorce settlement my ex-wife get 50% of my military retirement as a division of “marital property” for as long as I live. This is military retirement division is established law in all 50 states, and this would need to be investigated for application to this case.
Thus it’s very possible that the Uncle’s fixed annual income of $40,233 that was mentioned could be reduced significantly as part of the final settlement – by deductions such as either alimony, an education / readjustment amount to aid the wife in acquiring job skills, or as a division of their respective retirements (viewed as a marital asset to be divided like the home’s equity). So Ami’s Uncle may not be as well-off financially after dividing all of the marital assets as Ami initially reported.
Next, IRS excludes $500,000 (joint return / $250,000 individually) from taxation on the sale of the primary marital residence if the husband and wife have occupied it for two of the last five years. I assume that both spouses occupied the home as husband and wife and are qualified for this exclusion.
So there may be some capital gains tax to pay if the house is sold for more than $500,000 combined net gain in basis. (For example: A $700,000 sale price less $46,000 original cost basis, minus selling commissions, closing costs , pre-sale repairs, etc. – combined estimated at $40,000 = approximately $614,000 net sale proceeds before tax). So the tax on $114,000 would need to be divided between the spouses – paid from sale proceeds before their division between both spouses. The maximum federal tax rate on long term capital gains is 15% . So there could be about $17,100 of federal tax due, plus there may also be state income tax due on any sale proceeds in excess of excludable amounts.
A home valued at $700,000 in Silicon Valley would not be a palace. It might be a modest $250,000 house in another city. Looking at it from a practical standpoint, a 3-4 bedroom house is the same and offers the same utility wherever you are in the country - regardless of its market value. So why own one worth $700,000 in Silicon Valley when a similar house costs much less in another city? What makes this one special is the fact that it holds $700,000 in equity. That’s equity that can be used in myriad ways if it can be tapped into. I think $700,000 is a lot of emotional attachment for Ami’s Uncle to want to hang onto, and to go into debt for to buy out his ex’s half interest. From a purely investment standpoint I wouldn’t to it.
Both the Uncle and his ex might do better by selling the house, paying any tax due, and re-investing the proceeds to create passive retirement income streams for their golden years. The house could be sold with an owner carry-back note that provides both husband and wife supplemental passive retirement income streams, and payment of income tax on the excess non-excluded proceeds might be deferred, payable in small amounts as the note payments are received at some future date. A tax advisor should be consulted about the various options.
It’s a fact that you can rent a comparable home almost anywhere for much less than its mortgage payment. In today’s upside-down real estate market it might be far better economically to rent a more modest place to live (within the retirement budget) and to forego the high costs of home ownership (at least in silicon valley) for a while.
If Ami is a creative real estate investor, it’s always possible for her to locate a bargain property, such as a “subject-to” with minimal entry cost and taking over monthly payments, for each of these relatives. They either could be owners, or she could own their “bargain homes” and they could rent her investment properties. She could benefit from the appreciation in value, mortgage paydown, and tax benefits as their landlord.
My point in this rambling discussion is that we must consider all aspects of a situation and to determine the needs and goals of all parties involved, and to craft a solution that best meets those needs of those needs - just as we are taught when buying our investment properties. This process requires creative thinking outside of the box, and not acting out of emotions to reach a hasty settlement, nor to continue living in the same place, nor to consider only the more traditional and common solutions to problems.
For instance, instead of the Uncle cashing out the wife’s half of the home’s equity and creating a new conventional mortgage, why not create a new Deed of Trust and Note, making the ex-wife the note holder with the beneficial interest. This would save the Uncle the high costs associated with originating a new loan, and could be done much faster. The ex-wife could always sell her note to a note buyer in a simultaneous closing or cash it out some time in the future when she really needs the cash. In the mean time, she enjoys a nice retirement income stream from the interest on the note. If she never wants to have anything to do with her ex his monthly mortgage checks could automatically be paid directly into an escrow account at her bank by direct military payroll deposit.
Dan
June 13th, 2008 at 12:48 am
[…] To Divorce ProblemsRelationship Advice Blog Archive How To Chose The Right Divorce LawyerDivorce, State Laws, Retirement, Reverse Mortgages Tags > No Tags < This product is also listed in Home & Family Marriage New Products […]