When you’re divorcing, one of the questions curious friends and family eventually ask is, “So . . . are you going to keep the house?”
While a simple answer would make for easy conversation, the reality is that where real estate is concerned, simple answers are often difficult to come by. Should either you or your husband keep your primary residence, or should it be sold so the profits can be divided according to an agreed-upon formula? Even once that is settled, what should happen to the vacation homes?
Negotiating a divorce property settlement depends on a fair, impartial and accurate assessment of the value of the property to be divided. But, who should determine how much the real estate is worth? It isn’t something a mediator or a judge can decide. For an accurate evaluation, you’ll need the expertise of a professional real estate appraiser.
Here are a few factors to keep top-of-mind when you’re dealing with real estate appraisals.
Most real estate appraisals are based on comparable sales. To determine fair market value, an appraiser will look at the property in question, making special note of any unique features. Then, comparable properties that have recently sold in the same market (“comps”) will be identified. The more recent sales there are to compare to, the more confident you can be that these sale prices reflect actual market conditions. (If there’s one particularly low or high price, it’s an outlier that’s not representative of a typical sale for the area.) The comparable sales, in conjunction with any special features of the subject property, are used to determine a number that represents the appraiser’s best assessment of fair market value for your property.
Also, remember this: The property’s value as assessed by municipal authorities for tax purposes is also researched as part of the appraisal process, but it isn’t directly related to fair market value. Your property appraisal may come in much higher or lower than the assessed value used to calculate your property tax bill.
Unique features may be evaluated differently by different appraisers. For many residential properties, an appraisal is fairly easy to substantiate or defend. But what if your property is unique? Maybe you have the only property in the area with a deep water dock, a greenhouse, a stable or a four-car garage? In cases like these, appraisers’ conclusions may vary, sometimes considerably. When there is a substantial difference between each side’s appraisal of a property, a judge may require that a third independent appraisal be conducted.
One woman’s peaceful Zen garden may be another woman’s backyard eyesore. Part of the real estate appraiser’s expertise is in knowing how different real estate amenities contribute (or not) to market value –that’s why it’s essential your property is appraised by a dispassionate professional. Homeowners are often disappointed to find that the costly improvements they’re quite proud of are actually much less valuable to potential buyers than they’d expected. Some features, such as swimming pools, can add less to the market value of a property than what it cost to install them! The appraiser’s report will be rendered without bias or emotional attachment to the window treatments or cabana lighting.
Make sure you use an appraiser who’s knowledgeable in the local market. If your financial portfolio includes real estate in different markets, it is very important to engage appraisers who are familiar with those markets. Fair market value for a condo in Aspen, Colorado isn’t best evaluated by an expert on the real estate market in Westchester County, New York. Similarly, fair market values in locations with a large proportion of second homes, be it Nantucket or Naples, Palm Beach or Palm Springs, are most accurately assessed by professionals who work in those markets. Make sure you hire an appraiser who has expert knowledge of the market in which you’ll be selling.
Real estate values change over time. You may also need to call on a real estate appraiser if you need to determine what a property was worth at some time in the past. This is called an historical, or “retrospective” appraisal.
For example, if you married your husband and moved into a home he already owned, there was likely no appraisal of its value at that time. However, as part of your divorce settlement process –and dependent on the division of property regulations in your state –you might want to show that the property has gained value over your marriage, perhaps due to improvements you made to it with marital funds. You’ll need good estimates of its fair market value then and now. On the other side of that coin, a retrospective appraisal is also worth having if you sell a property at a loss and need to determine how much of that loss was incurred during the marriage.
Fair market value is only part of the story. Once you have determined the fair market value, you’ll need to subtract the existing mortgages to find out what your current equity is in the property.
Your equity in the property is not the same as money in the bank! If you can sell your property for more than you paid, you may owe both Federal and state capital gains tax after your $250,000 exclusion as a single woman. (Two important notes: 1) This $250K exclusion is applicable only to your primary residence, not your vacation or investment real estate, 2) Federal capital gains taxes were just raised and can now range from 15 to 23.8 percent.)
Here’s a simple example to illustrate my point. Let’s say the appraised fair market value of your house is $1,000,000. You have a $400,000 mortgage and you originally paid $200,000 for the house. Your selling costs are 6 percent or $60,000.
The $1,000,000 sales price minus $60,000 selling costs = $940,000.
Since your original purchase price was $200,000, $940,000 – $200,000 = $740,000 profit.
$740,000 profit – $250,000 exclusion on primary residence = $490,000 capital gains.
For simplicity, let’s assume your total capital gains tax rate is 20 percent. $490,000 capital gains X 20 percent = $98,000 capital gains tax due.
So . . . What do you end up with after the sale? $940,000 after selling costs minus outstanding $400,000 mortgage minus $98,000 capital gains tax = $442,000
That $442,000 is now somewhat comparable to $442,000 in the bank. Why do I say only “somewhat comparable?” Because until you sell it, your real estate has carrying costs that money in the bank doesn’t have – real estate taxes, mortgage payments, water and sewerage bills, landscaping, fuel, repairs and maintenance, etc.
According to a recent article in The Wall Street Journal, appraisals required for divorce proceedings represent an increasing proportion of real estate appraisers’ business, and due to their potentially litigious context, a divorce appraisal may cost several times as much as a simple appraisal for a real estate transaction or refinance.
Negotiating a fair divorce property settlement is complicated . . . and it can be difficult. You want your settlement to be determined based on true, accurate and complete information, and as always, the best possible outcome depends on having experts on your team who can anticipate the subtleties of the settlement process. Whether you and your spouse own one primary residence or many properties spread far and wide, a qualified real estate appraiser has a critical role to play in this process.