When spouses decide to separate they need to consider how to divide their assets and their debt. Often the largest asset is the family residence and if one spouse wishes to keep it they need to pay the other spouse one half of the value of the house at the date of separation.
The value can be determined either by the tax assessment, an appraisal or by realtors’ opinions. A court would use an appraisal. The question that arises is what deductions can be made from that value.
First of all, if either spouse had money when the spouses started living together and used that money to purchase the family residence, that spouse will be entitled to repayment of their investment. Similarly if either spouse was gifted money by a third party or inherited money and used it to reduce the mortgage on the family residence that money will be repaid.
A more controversial issue is whether or not to deduct a notional real estate commission and or a pre-payment penalty which is owing if the mortgage is paid out or refinanced. The courts have ruled that these expenses can be deducted only if the spouse who is retaining the family residence actually intends to sell the family residence in the near future (6 months to 1 year) thereby actually incurring these costs. If the spouse intends to keep the family residence for several years before selling it these fees are not to be deducted.
This is a factor that needs to be seriously considered by any spouse who is hoping to keep the family residence. Real estate commissions are typically 6% or 7% on the first $100,000.00 of the value and 3% on the remainder plus GST. They often are $15,000.00 to $20,000.00 or more depending on the value of the home.
Mortgage penalties as well can be very large and can be incurred either by selling the family residence at a later date or if you need to increase your mortgage to borrow money to pay your spouse. Some lenders require you to pay three months’ interest but many require you to pay either three months’ interest or the entire amount of interest the lender is foregoing to the end of the mortgage term, whichever is greater. If interest rates are rising, mortgage penalties are typically smaller because the lender can re-loan the money at a higher interest rate. When interest rates are falling, penalties can be very large as the lender has to re-loan the money at a lower rate and you will pay the difference. It’s important to ask your lender how much the mortgage penalty will be when considering whether or not to keep the family residence.