Chapter 2 Financial Realities No One Talks About

• Library: Divorce & Money (Nolo) (2020 Ed.)

CHAPTER 2: Financial Realities No One Talks About

In Divorce, Everything Takes Longer and Costs More

You're at Risk When You're Financially Connected to Another Person

The IRS Is Watching Your Divorce

Cash Is King

You're Playing for Keeps

The true cost of divorce is rarely discussed openly.

You're probably better prepared to negotiate a car purchase than to negotiate a divorce. Most of us accept that the advertised "sticker" price of the car is not the final price. With a new car, there's often a "dealer markup," taxes and other fees that will be tacked on before you drive the car off the lot. If the car is preowned, you may have the opportunity to negotiate a lower price. You'll also need to factor in the cost of insurance, registration fees, repairs, and maintenance.

Many people enter divorce looking for a "sticker price," which will be final and all-inclusive. But there's just no way to predict the cost of divorce. There are too many unforeseeable variables, even for spouses that know their net worth. Costs and fees, such as those related to refinancing and transferring property, conducting research, and hiring experts, can turn what you thought was a great deal into one with devastating financial consequences.

You will need to keep a sharp eye out for additional amounts you may be charged, but were unaware of when you agreed to a settlement. Divorce clients that focus primarily on the legal or emotional implications of their situation, often fail to consider important financial angles of their settlements.

Take the family home as one example. You have to consider much more than the price you paid for it and the eventual sale price. In addition you must:

• Make sure property taxes are paid and current.
• Search for contractors' liens on the property.
• Make sure no state or federal taxing authority has a lien on the property.
• Keep the mortgage payments current and free of late charges.
• Confirm there are no judgments on record, which must be paid before title can be cleared for transfer.

If you were going to sell your house under conditions other than a divorce, you would have to consider and negotiate the cost of necessary repairs or inspections and a real estate agent's commission (unless you sold the house yourself). You would also consider the implications of a capital gains tax. Under current tax law, if you have lived in your home for two of the past five years, you pay taxes on any profit beyond the first $250,000, or $500,000 if you are married and file jointly with your spouse.

In our experience, these important considerations are rarely discussed during a divorce. Many courts must, by law, consider only the equity value of a home. The costs of sale, federal and state taxes, and other subsidiary expenses are beyond their scope. Spouses often pay their exes for a full share of a home's equity, while totally ignoring the other normal costs and benefits of the house sale.

Only after the sale is final does one spouse recognize the benefits or risks of carrying those costs alone. And most divorcing couples do sell their family homes—either at the time of judgment or within five years after the divorce.

At divorce, you and your spouse are essentially "selling" everything you own—either by way of transfer to the other or to an outsider.

It is critical that you approach divorce the way you would any other business transaction. Look at your situation from a realistic perspective that takes all predictable financial events into account, especially those with tax-related consequences.

Financial reality begins where legal...