Divorce Loan Options

[Julie Coleman]

My ex and I purchased a duplex in Glendale, CA as marital property in 2018, yet I am currently in the process of a divorce with my ex.

Due to the divorce proceedings, I would like to know my options regarding the property.

1. 1) I keep the duplex. What is required to take my ex off of the title and loan? He wants out.
   1. Will I need to refinance to get him off of the loan and title?
   2. Will I need to refinance using my income only in order to get a primary residence loan and a lower interest rate?
   3. It is a duplex that neither of us currently live in. Can the rental income be used to qualify for the loan? If so, how does that affect the interest rate and remaining principal?
2. 2) My ex and I sell the duplex.
   1. Since we have owned the property for 5 years and lived in it from 2018-2020, we avoid capital gains tax, correct?
   2. We split the profits.
   3. We pay ~5-6% sellers commission.
   4. In order to buy another property with my proceeds, I will need to get a new loan similar to Option 1 qualifications.

Thank you for your advice in advance. 

[Andrew Garcia]

Hi @Julie Coleman, Below are my answers

1. Refinance option.

     a. Yes

     b. If you are going to live in at least one unit, you can do a rate and term primary residence refinance. Your ex's income will not be used to qualify. The interest rate may or may not be lower depending on your current interest rate.

     c. The rental income from one side can be used to qualify for the loan if you live in the other unit. It does not affect the interest rate or principal.

2. Selling option.

     a. If you lived in it for 2 of the last 5 years, you can be exempt from $250k if single and $500k if married. Avoiding it depends on how much capital gains you had.

     b. Yes, you will need to get a new primary residence loan similar to option 1.

Hope this helps! Let me know if I can be of any assistance.

[Julie Coleman]

@Andrew Garcia Thanks for the quick response. I am starting to talk to various lenders about options. It cash flows nicely with a 3% interest rate and has doubled in value in the last 3 years. I give myself credit for that :) Luckily I can afford to buy him out, but at the property's current value and interest rates, I would have to sacrifice negative cashflow for a few years after refinancing on my own. It is in the Los Angeles market and is bound to further appreciate over the years. Not sure if I should sell and buy something different or keep the investment based on the numbers. 

[Robert Reynolds]

Hi @Julie Coleman, 

These are my thoughts on the matter but please talk to a CPA for tax advice and a lender for lending advice. 

Yes you would need to refinance to get your ex off the loan and with the current rates for investment loans (approximately 7%+) it could possibly affect your cashflow. The negative cashflow can then affect how much you will qualify on buying your own residence if that is what you want to do. You could also house hack the duplex and live in one side, if that is something you are open to and one of your tenants will move out. 

The simplest option may be to just sell it, take your proceeds and start over with a nice cushion. You must have gained some nice appreciation since buying it, and since you've lived in it 2 of the last 5 years, you will qualify for the $500k tax free of equity gained on the sale. You can then use that money and the money you were going to use to buy out your ex to buy several properties and jumpstart your investing journey. If your debt to income ratio gets too high, you can use a DSCR loan that doesn't take your DTI into account, but just the amount of money you have and the rent you will get.

[Stephanie P.]

Quote from @Julie Coleman:

My ex and I purchased a duplex in Glendale, CA as marital property in 2018, yet I am currently in the process of a divorce with my ex.

Due to the divorce proceedings, I would like to know my options regarding the property.

1. 1) I keep the duplex. What is required to take my ex off of the title and loan? He wants out.
   1. Will I need to refinance to get him off of the loan and title?
   2. Will I need to refinance using my income only in order to get a primary residence loan and a lower interest rate?
   3. It is a duplex that neither of us currently live in. Can the rental income be used to qualify for the loan? If so, how does that affect the interest rate and remaining principal?
2. 2) My ex and I sell the duplex.
   1. Since we have owned the property for 5 years and lived in it from 2018-2020, we avoid capital gains tax, correct?
   2. We split the profits.
   3. We pay ~5-6% sellers commission.
   4. In order to buy another property with my proceeds, I will need to get a new loan similar to Option 1 qualifications.

Thank you for your advice in advance. 

Like others have said, because you lived in it, you would not have to pay on up to $500K of equity gained on sale, but a CPA would be a better person to talk to.  A 1031 exchange would be a good way to go for something like this as well.  @Dave Foster is the best person to talk to about these on Biggerpockets.  He's an expert.

Know that right now you will not get a lower interest rate than you had in 2018.  3% is not an option, especially if it's a rental now, so find a good broker that originates in California and find out what the rates are doing and how the numbers shake out.  Call @Jared Rine.  He can help you with that.  I'd help you, but not licensed in California.

Sorry to hear about your divorce.  Always tough.  Best of luck

Stephanie

[Scotty Gifford]

Julie, 

The good news is that you are seeking out help, which is always the first step. :)

I would agree with what Andrew Garcia, said about your options.

My wife and I specialize in helping, divorcing couples make informed decisions are what to do about the house during the divorce. We do this because we have both been there and know how it feels during a divorce. 

Just know there are rules about what counts as income for jobs/support/rentals, how long you have been receiving income, and how long it will continue for lending purposes. There are also rules about how much money you can pull out of any properties. (80 % is what most people tell you, Most people get all of these all wrong and wait too long to know if they can afford to keep a property, especially during divorce.)  

Our goal is to help people Remove the Fear and Learn the Facts surrounding divorce. Maybe start with our divorce buyout calculator and read some of our blog posts then give us a call. Our divorce buyout calulator 

Feel free to give us a call, and we can walk you through your options more but know the details matter on what is agreed upon during your MSA. Know whatever you agree to during Mediation can not be overturned, even by a judge, so knowing your options before you go to mediation and knowing that you are qualified to keep the property is vital. 

Wishes you the best during these stressful times! 

[Dave Foster]

@Stephanie P. Thank You for the shoutout! @Julie Coleman The IRS will honor whatever is in your divorce decree from the 1031 perspective. The other questions are unique to your situation so I cant speak on them but the 1031 option will be there if you need it.

[Andrew Garcia]

Quote from @Julie Coleman:

@Andrew Garcia Thanks for the quick response. I am starting to talk to various lenders about options. It cash flows nicely with a 3% interest rate and has doubled in value in the last 3 years. I give myself credit for that :) Luckily I can afford to buy him out, but at the property's current value and interest rates, I would have to sacrifice negative cashflow for a few years after refinancing on my own. It is in the Los Angeles market and is bound to further appreciate over the years. Not sure if I should sell and buy something different or keep the investment based on the numbers. 

 @Julie Coleman, if you refinance as a primary, you could get something in the 5s depending on your scenario. That will obviously affect your cashflow but not as bad as a rate in the 7s.

It really comes down to whether you can utilize that cash better somewhere else. If you can, selling would be best. If you like this property and can handle negative cashflow for a few years, refinancing is likely the way to go.

Also, if you are moving into the property, your overall cashflow does not really change since now you are living on a reduced mortgage payment. Even if you pay $2,000 per month, that is a lot cheaper than going negative cashflow $200 per month on this and moving into a primary where you have a $3,500 payment. 

Then, once you decide to move out, the property will likely have appreciated so you could sell it for even more. Alternatively, you could keep it and it might be cashflow positive as rental appreciation takes effect.

Hope this helps! Feel free to reach out with any questions.

[Upen Patel]

Hey! @Julie Coleman Do you have the cash to pay him off? Is he planning to buy another property and wants this debt be removed from his credit?

If you have the cash and he doesn't need this to be removed from this credit, you can execute a Quit Claim Deed removing him from title. You pay him the the cash. The loan stays as is. Don't record the QCD and you will be fine. When the rates come down a bit, you can refi. I have seen many divorce agreements giving both parties significant amount of time (1-2 yrs) to buy out or sell. Not an ideal solution, but a solution never the less.

[Jared Rine]

@Stephanie P. thanks always for the shout.  @Julie Coleman...you've received some good answers here already.  I can appreciate the BP community, but I'm going to add my $0.02.  

1. To get him off both, YES, you'd need to refinance.  2. Yes, for primary residence.  3. Yes, you can and even though 'everyone and their mom' is touting about 7%+ rates on dscr loans (no personal income), if not 8%, you can still find them in the 6's.  I'm still getting them done there, even now.  Most of it is knowing where to go and who's actually going to execute.

2. yes. 4. yes, you'd need to do that.

Hopefully you can get this worked out amicably.  Thanks