I recently received the following message via email regarding a particular divorce proceeding: "Quick Question: What's going to happen with the house?" The question is indeed quick. I'll give them that. The answer is not so quick. In the context of the New Mexico family law property division, the answer lies in a combination of what you want to happen to the house, what the other side wants to happen with the house, and what is financially feasible or not feasible.
A house is generally just a building of some form, much like any other. Only we use these physical structures for the very personal business of living out our daily lives along with whatever our family is, and that's where a house becomes a "home." For some, there are substantial emotional connections with our homes, while others have no such attachment. Most people probably fall somewhere between the two when it comes to their regard for the home at divorce. How the home fits into a divorce can also be complicated when considering how the house fits into your short- and long-term personal and financial objectives.
We at Cortez & Hoskovec are committed to listening to our clients and understanding their goals first in the process of forming the plan to reach those goals.
To schedule a consultation with our team, contact us online or via phone at (505) 544-5126.
What Makes a "Home?"
In family law, we refer to the "marital residence" generically whether the home is a lease, rental, owned, or owned/mortgaged property. Here we will consider the marital residence as a property item to be disposed of in the divorce. Here we are only concerned with houses in which the community has ownership and/or equitable interest. If the house was purchased during the marriage unless the house was purchased with inheritance, or there was a Prenuptial Agreement or an enforceable Sole and Separate Property conveyance, a home purchased during the marriage is going to be 100% community property in New Mexico and subject to 50/50 division at divorce.
Common Questions During Divorces
Some common questions that pop up regarding houses and property division during divorce cases include:
"What if My Spouse Owned the House Before We Married?”
On the date of marriage, that house, its equity being the core financial asset we discuss here, is 100% the separate property of the one who owned it before the marriage. But, as each day, week, and year passes during the marriage, the community acquires a lien on the property that can and ultimately will swallow the first spouse's separate interest given enough time. This is a concept known as transmutation, where an item's characterization changes from being a separate property item to being a community property item. It is not only moved by the passage of time.
Once you are married, all income is community income, even if only one spouse works. After the marriage date, ALL mortgage payments are made with community income, yes, even if you only moved in and never worked during the marriage. Also, any improvements, and the increased property value-added that comes with improvements, will have been paid for by the community.
So if the community pays for landscaping, and increases the house's value by $25,000.00, then that increase in value is community property, and each spouse would be entitled to their $12,500.00 share of it upon divorce no matter who owned it before the marriage. Also, if external factors cause home values in the area to increase and the marital residence is among them, the increase in value will increase equity during the marriage. That change of value is community property.
Another event that can trigger transmutation is a refinance of the marital residence. If one spouse owned and financed it prior to marriage and then the parties refinanced the mortgage during the marriage, the house typically becomes community property at that point.
"Can My Spouse Force Me to Sell the House & Move Out if I Don’t Want to?”
Maybe. Suppose there is a mortgage on the property, and both parties' names appear on the mortgage. In that case, the very first question to determine the answer is whether or not you will be able to refinance the house into your name alone and get the others off the finance agreement. If the answer is yes, then you're a third of the way to keeping the house. The next question is whether or not the community has sufficient assets, or you have sufficient separate assets, to buy out the other's equity in the house. If this is also a yes, then you're two-thirds of the way there.
The last substantial hurdle would be the marital debt you are dividing. Unfortunately, community debt is often comparable to or even greater than any community property interest in the house's equity. So if this is your financial situation, unless you both agree otherwise, the Courts will generally require the house to be sold and proceeds applied to community debt, with the parties either sharing proceeds remaining after satisfaction of those debts or sharing debt remaining that the proceeds did not cover. Divorce is a process intended to sever your legal and financial relationships with one another, so satisfying debts with assets is what the process means to do.
What Will Happen to the House in My Divorce?
It is quite common in divorce that neither party wants to keep the house. Rarer is the situation where both parties want the house, and they fight over it. Generally, it is one party that prefers to keep the house, so if the community has the resources as described above, that party can generally keep the house if they want to, and as long as they can reach an agreement with the other side about how the equity will be equalized in the Marital Settlement Agreement. Suppose the parties cannot reach an agreement on the issue. In that case, that party can still generally keep the home if they convince the judge that their proposal to keep the house is financially feasible when balancing the interests of both.
A note about wanting to keep the house: If you want to negotiate to keep the house and also want to settle out of court, you and your spouse, either amongst yourselves or through counsel, will need to agree on the market value of the house you propose to keep. Generally, when assigning values to property items that do not have specific values like an IRA or outstanding credit card balance, say a collector motorcycle or gun collection, the person keeping it will tend to want to undervalue it, and the person giving it up will tend to want to overvalue it because that item will ultimately represent a line-item dollar amount in an Assets and Liabilities Equalization Spreadsheet. Remember that the equity in the house is the core financial asset we are negotiating.
So, suppose you want to keep the house. Your house is 100% community property. You currently owe $200,000.00 on the mortgage, and you and your spouse agree that its market value is $300,000.00. By agreeing to the market value of $300,000.00, you also agree that there is $100,000.00 in equity that belongs to the community. Half of this is yours, and half is the other's, so you have to find a way to pay the other their $50,000.00 for their interest so it can be yours. Often this is done through refinancing or by equalizing that amount against other assets the other is taking like the IRA or other property (maybe that collector motorcycle and gun collection).
Still, you need to be aware that the Court will not deduct any value for closing costs from the other's interest because you will not incur any in keeping the house. Part of the agreement or court ruling will also likely require you to refinance the house into your name alone within a reasonable amount of time if the other is on the mortgage. So, if you want to keep the house, you are somewhat at a disadvantage, but you can usually negotiate an acceptable agreement with good legal advice and guidance.
Of course, the shoe is on the other foot if your spouse wishes to keep the house. You may be able to leverage that to some extent. However, the need for good legal advice and guidance is not diminished because you still need to make sure to enter an agreement that frees you from all future potential liability for the house and anything the other might do with it later.
If you have gotten this far into the blog, you probably have good reasons for wanting to know these things, and hopefully, it has provided some helpful information. However, it is more likely that a little general information has caused you to have more questions about how these general concepts would fit into your specific and unique facts.
There also may be family law terminology used above that you are unfamiliar with, which is precisely why you need to consult with an attorney before you wade into this process. You need to get reliable information and competent advice to make informed decisions and an attorney you trust to navigate the waters of New Mexico Community Property Law in a divorce. You do not want to be a novice or be represented by one because there will not be a do-over.
We have practiced exclusively in New Mexico Family Law for many years, and Community Property allocation is part of every New Mexico divorce proceeding. So, if this blog has provided more questions than answers, call our office to schedule a time to speak with one of our attorneys for those answers. Thank you for considering our firm to serve your legal needs.
To schedule a consultation with our team, contact us online or via phone at (505) 544-5126.