Consequences of divorce
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When buying a real estate property as a married couple, special attention should be paid to the potential termination of the marriage, so as to avoid the trouble and disagreements that frequently arise when it comes to the division or transfer of assets.
When a couple becomes divorced or separated, it is often difficult to find a fair way to divide common real estate assets. The division is often subject to various laws or regulations, or even the provisions of a divorce settlement agreement. First of all, the couple should consider the effects and consequences of divorce: the splitting of pension plans and other assets that have been used to acquire the property, the origin of other forms of equity, legal obligations, and of course, the taxation resulting from the chosen division solution.
In the event of marriage separation, the two following factors should be considered:
- The matrimonal regime: participation in joint ownership of aquired property, separation or commonality of property
- The form of ownership adopted by the future owners: co-ownership or common ownership
In the case of divorce, the matrimonial regime is liquidated when it comes to joint ownership of acquired property. This means determining which proportion of the property has been acquired during the years of marriage (acquired property), except for possible inheritance, donations, and pre-marriage assets that are considered personal property. In the case of marriage under separation of property, in which assets were never put into common ownership, the division is relatively simple. Except for cases of joint ownership of a property that is difficult to divide, involving the transfer of one or two parts of ownership. Real estate transfers between spouses in the case of marriage termination are usually quite expensive and subject to real estate gain tax. Nevertheless, legislation has provided for a tax referral in the case of such a transfer. In the case of diagreement, the assigned tax payer is subject to immediate taxation.
When separating property, a cohabitating couple's situation is similar to that of a married couple, but in this case, there are no common assets. Each partner retains ownership of his or her assets during the years of shared life, with all the more reason in case of a break-up.
The way that partners are proportionately considered in divorce cases is regulated by laws and contracts. However, difficulties could arise in the application. In general, there are three conceivable scenarios:
- One of the partners takes over the property and compensates the other (for equity invested, more than half of the acquired property). Different calculations of compensation are possible if one of the partners waives the refunding of his or her equity or secures a right of usufruct.
- The real estate property is sold and the product of the sale is distributed. This solution is often considered when neither one of the former spouses can take over the mortgage debt due to costs or simply due to lending conditions.
- The ownership relations remain the same, which helps to avoid any inappropriate sale, but often gives rise to conflicts over payment and ownership-related fees.
As we have already seen, there are laws allowing for the disposal or housing premises according to the matrimonial regime adopted. Nevertheless, certain financial and administrative complications will still need to be resolved.
These disagreements may arise in particular if one of the two partners does not want to give up his or her co-ownership. In such a case, it is strongly advised that you have the market value of the property assessed and use this as a basis for negotiation in order to avoid a potential requalification of settlement agreements at the time of the verdict. It can also happen that the provisions of the divorce ruling are unenforcable, especially when the ownership is attributed to one of the partners and this partner is not accepted by the financial institution as a sole borrower. In addition, the financial institution, having already been the creditor of a financed property for several years on the basis of an acquisition price that is often less than the new market value, will likely be reluctant to accept a debt increase in order to compensate for the ceding spouse. In this case, the partner wishing to keep the property could take over some of the mortgage interest and obtain in exchange a right of purchase, usufruct or any other form of compensation.
Should any arrangement made when signing a mortgage loan be changed, then other costs may cause financial difficulties for the two parties in the event of retaining or selling the property. These costs can be substantial. They will have to be taken into account with desiding about the future of real estate assets. In both scenarios (sale to a third party or assignment between the two former spouses), potential expenses may arise from a penalty for terminating a fixed rate loan early or without prior notice as well as from the cost of creating additional certificates if the debt is increased in order to provide financial compensation. Other costs include notary fees, capital gain tax in case of property assignment, tax on LPP assets or 3rd pillar A assets that will be injected into repayment of the debt in order to respect the qualifying conditions of the mortgage loan (required ratio of 33%), costs of assessments, and other handling costs.
To conclude, we advise you to seek the advice of your notary or lawyer when buying property in order to choose the best form of ownership. You should also keep, insofar as possible, all written documents relating to the purchase of your home, including those for later costs, so that you will be able to prove, if necessary, the origin of invested funds and the money used to pay amortisations.
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