One of the first questions curious friends and family ask when you’re separating is, “So… are you going to keep the house?”
While a straightforward answer might make for an easy conversation, the reality is that simple solutions are sometimes difficult to come by in real estate. Should your principal residence be kept by you or your husband, or should it be sold and the proceeds divided according to an agreed-upon formula? What should happen to the vacation properties after that is resolved?
What is a divorce appraisal?
A fair, objective, and accurate evaluation of the worth of the property to be divided is essential when negotiating a divorce property settlement. But who is to say how much a piece of real estate is worth? It’s not something a judge or a mediator can decide. You’ll need the help of a professional real estate appraiser for an appropriate assessment.
How is a house appraised during a divorce?
The majority of real estate appraisals are based on similar sales. An appraiser will examine the property in question to assess fair market value, taking specific notice of any distinctive features. Then, in the same market, comparable properties that have recently sold (“comps”) will be discovered. The more recent sales you have to compare against, the more certain you may be that these sale prices are accurate. (If there’s a sale that’s very low or high, it’s an outlier that’s not reflective of the area.) The appraiser uses the comparable transactions, as well as any unique attributes of the subject property, to arrive at a number that represents the appraiser’s best estimate of fair market value for your home.
Also keep in mind that the property’s worth as determined by local authorities for tax purposes is investigated as part of the appraisal process, but it is not directly related to fair market value. The appraised value used to compute your property tax bill could be much higher or lower than the assessed value.
What do appraisers real estate do?
Different appraisers may value unique qualities differently. An appraisal is relatively easy to substantiate or defend for many residential properties. But what if your home is one-of-a-kind? Perhaps your home is the only one in the neighbourhood with a deep water dock, a greenhouse, a stable, or a four-car garage? In situations like these, appraisers’ assessments can differ significantly. A judge may order a third independent appraisal when there is a significant gap between each side’s appraisal of a property.
A Zen garden in one woman’s property may be an eyesore in another’s. Knowing how diverse real estate amenities contribute (or do not contribute) to market worth is part of the real estate appraiser’s competence, which is why it’s critical that your property be appraised by a neutral professional. Homeowners are frequently unhappy to discover that the expensive upgrades they’re so proud of aren’t as beneficial to potential buyers as they’d hoped. Swimming pools, for example, might add less to the market worth of a home than the expense of their installation! The appraiser’s report will be written without regard for the window coverings or cabana lighting.
Make certain you use an appraiser who is familiar with the local market. It’s critical to hire appraisers that are knowledgeable with different marketplaces if your financial portfolio contains real estate in different areas. An expert on the real estate market in the City of Toronto, Ontario isn’t the ideal person to determine the fair market value of a condo at Blue Mountian, Collingwood. Similarly, professionals who operate in areas with a high concentration of second homes, such as Muskoka or Haliburton, are the most reliable assessors of fair market values. Make sure you pick an appraiser who is well-versed in the market you’ll be selling in.
The value of real estate fluctuates throughout time. If you need to know how much a property was worth in the past, you might need to hire a real estate appraiser. This is referred described as a “retrospective” or “historical” appraisal.
If you married your partner and moved into a home that they already owned, there was probably no assessment done at the time. However, as part of your divorce settlement – and depending on your province’s property division laws – you may wish to establish that the property has appreciated in value over the course of your marriage, perhaps due to improvements you made with marital finances. You’ll need accurate estimations of its current and historical fair market worth. On the other hand, if you sell a property at a loss and need to figure out how much of that loss was incurred during the marriage, a retroactive appraisal is a good idea.
Only part of the narrative is fair market value. After you’ve estimated the fair market value, deduct the existing mortgages to discover how much equity you have in the home.
What is a divorce appraisal?
Your house equity is not the same as cash in the bank! After your $250,000 exclusion as a single woman, you may owe both federal and state capital gains tax if you can sell your property for more than you bought.
There are two crucial points to remember:
1) This $250K exception applies only to your primary residence and not to your vacation or investment property;
2) Federal capital gains taxes have recently been hiked and can now vary from 15% to 23.8 percent.
To demonstrate my point, I’ve included a short example. Let’s say your home’s appraised fair market value is $1,000,000. You have a $400,000 mortgage on a house that you paid $200,000 for. Your selling costs are $60,000, or 6%.
The sales price of $1,000,000 minus $60,000 in selling charges is $940,000.
Since your original purchase price was $200,000, your profit is $740,000 ($940,000 – $200,000).
$740,000 profit minus $250,000 primary residence exclusion Equals $490,000 capital gains.
Let’s pretend your overall capital gains tax rate is 20% for the sake of simplicity. $490,000 in capital gains multiplied by 20% equals $98,000 in capital gains tax.
So, after the transaction, what do you wind up with? $940,000 – $400,000 in outstanding mortgage minus $98,000 in capital gains tax Equals $442,000
That $442,000 is now about equivalent to $442,000 in a bank account. Why do I just use the phrase “somewhat comparable”? Because real estate has carrying costs that money in the bank does not: property taxes, mortgage payments, water and sewerage bills, landscaping, fuel, repairs and upkeep, and so on.
According to a recent storey in The Wall Street Journal, appraisals for divorce proceedings are becoming more common, and because of the potentially litigious nature of the situation, a divorce appraisal can cost several times more than a basic appraisal for a real estate sale or refinance.
Negotiating a fair divorce property settlement is difficult… and complicated. You want your settlement to be based on genuine, precise, and comprehensive information, and having professionals on your team who can anticipate the nuances of the settlement process can help you get the best possible result. A trained real estate appraiser plays a key part in this procedure, whether you and your spouse own one primary property or multiple properties spread out across the country.
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