Who gets the apartment after a divorce?

By Elise Pettus  | April 30, 2013 - 8:58AM

If you are thinking about divorce in New York City, you are thinking about real estate.

“The home is almost always the major issue,” says real estate broker Deborah Lupard of Warburg, herself a divorced homeowner in TriBeCa. “Where are you going to go?” 

If you and your spouse own a house or an apartment together, chances are this is your primary asset or at least one of them. And it’s not many couples anywhere--let alone New York City--that can sell their home and buy two comparable ones. It can be a thorny question and often the most difficult to work out, especially if there are kids in the picture.

The most realistic course of action is often to sell it. But if you’ve been raising kids who are still at home, it may seem unimaginable to uproot them during what is likely the biggest crisis of their lives.

As one Corcoran realtor who has been divorced put it: “A home is about what goes on in it, but a property has real value.” Try reconciling these two during what is likely the greatest emotional upheaval of your life.

“There are myriad ways the story can go,” says divorce attorney Ann Diamond of Aronson, Mayefsky and Sloan. And there are also some typical scenarios. If kids are involved, a judge will often rule that the house remain with the custodial parent.

While that often provides a sense of immediate emotional security, it might not always be the best longterm decision.

And in a city where the majority of residents are actually renters there can be special implications when it comes to divorce—namely, what happens in the case of rent-stabilization?

1. Doing the numbers

Remember to think carefully about the costs of keeping a co-op or condo in Manhattan. Take a cold hard look at what the taxes, maintenance, repairs and mortgage will cost you per year.

Then, think about what happens when and if you do go to sell it at some point in the future. Aside from broker and attorney fees, you will almost certainly have significant capital gains. As an individual you pay taxes on any capital gains over $250,000 (and this exemption only applies to a home that serves as your primary residence).

If you have a choice between taking $1 million in cash as part of your divorce settlement or a house appraised at $1 million--but purchased for $300,000--be aware of what this means: You will be taking on all the carrying costs, plus the illiquidity, and the sale means you will be taxed on $475,000 ($700,000 gain minus $250,000 individual allowance). With federal capital gains taxes currently at 20% and with additional state and city taxes, you could owe $85,000.

Given all that, you may feel that fighting to keep the house is still worth it.

“I wasn’t really attached to the apartment emotionally,” says Lupard, “but I knew that it would increase in value, I knew it would be good for my son to have the continuity, and at the time, it was a comfort to have a roof over my head.”

On the other hand, Lupard says, “Don’t keep the house because a part of you can’t move on from the relationship and don’t keep the house if you can’t afford it!” Time to be ruthlessly honest with yourself and take a hard look at your financial options.

Then again, it may not be your decision in the end.

If one spouse wants to sell, and the other doesn’t, or if one of you can’t afford to buy out the other, but there are three school age kids living there, it may be a situation for a judge to decide.

“If the two of you can’t resolve it, the courts will do it for you,” says Diamond. “The court has the power to give ownership or mandate the sale if they decide that’s what’s best in the long run.” That is, unless the house or apartment belongs to neither spouse, but is owned by one spouse’s parents or say, a trust.

2. Selling while separated

If you do decide to sell, there are some further decisions to make. Selling before you divorce means that you only pay taxes on gains over $500,000 as opposed to over $250,000 if you sell as an individual.

But selling your home as a couple under intense duress is no picnic.

“Showing your home when you are at the height of grief is just a nightmare,” says real estate agent Lisa Detwiler of Corcoran in Brooklyn, who has sold property for about 20 divorcing couples since her own divorce.

“It helps if they can be sensitive to the emotional dimension of the situation,” says Detwiler. Also, the broker has to be very aware that they are working for both spouses, which can be tricky.

Not surprisingly, divorcing couples cannot always agree on who will sell their property.  In this instance, Diamond says a judge might determine that each spouse pick a broker and those two brokers pick a third who ultimately gets the job.  More often than not, this motivates couples to decide on a realtor.

The same can be done with choosing appraisers, if necessary. Braddock & Purcell, a company in the business of matching real estate agents with buyers and sellers, does an increasing amount of work with splitting couples who need a neutral and knowledgeable party.

“We send them three realtors who specifically know the neighborhood,” says partner Kathy Braddock. "We also think it's helpful to get three different pricing opinions.”

Some people worry about prospective buyers smelling a bargain in a divorce sale. There are even sellers who stage the bedrooms with men’s clothing after the husband has moved out, just to ward off the scent of desperation that might tempt potential buyers to bid low or hold out for a discount.

3. Rent stabilization and divorce

A particularly challenging but also a classic New York scenario: the divorcing couple lives in a rent stabilized apartment, in say, Tribeca’s Independence Plaza or in Westbeth, the coveted artists’ building in the West Village where a two-bedroom apartment can still rent for $950 a month.

These are considered unique properties and often like heirlooms, passed down through generations.

“How do you value a Mitchell Lama apartment or a rent stabilized place?” asks Diamond.

If it was virtually part of an inheritance, it may be awarded entirely to the inheriting spouse, but it’s likely that improvements were made using marital assets at some point, which complicates the picture. In any event, neither spouse can go out and find a comparable property for the same amount of money.

This calls for some thoughtful, creative solutions and sometimes protracted negotiation. Taking the apartment may mean that the other spouse pays less in child support or the wife foregoes alimony. Similarly, if one spouse gets the house, which happens to be a brownstone with a ground floor rental unit, the other will likely be able to reduce child support or alimony.

In any divorce, somebody has to move out. The upside of divorcing in New York, unlike a country hamlet or a small suburb, is that it will always be big enough for the two of you. The downside is that somehow, you both have to pay for it.

Elise Pettus, is the founder of UNtied, a new website for separating and divorcing women. Subscribe to learn about their upcoming evening on real estate and divorce May 15th to read their articles, and connect with other women going through a split.

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