Closure on Marriage, Foreclosure on House
Q: I agreed to let my ex-wife have our home when we divorced. However, she recently let it fall into foreclosure, and now my credit is ruined. I was going to buy a new home, but the lender has pulled my funding. Now I can’t find a company to finance the purchase. Plus, I can’t find relief with credit companies to clear my name.
A: It’s too late now, but there was a way for you to have avoided the foreclosure altogether. You could have required your ex-wife to sign a “Deed of Trust to Secure Assumption” when you got divorced. That way, you would have been able to make the payments when she defaulted, and the home then would have belonged to you.
Of course, you would have had to monitor her mortgage payments to make sure she was keeping current. Typically, notices of non-payment are sent to the home-owner’s address. As soon as you found out that she was behind, you could have stepped in, made the payments, and taken the home from her.
Note, though, that even when a Deed of Trust to Secure Assumption exists, the unpaid mortgage payments are sometimes so large that the home still gets lost to foreclosure. In addition to the cash needed to make the delinquent mortgage payments, you would need to make all future mortgage payments, and pay for the upkeep, utilities, property taxes and insurance on the home.
The bottom line is that when you and your ex-wife bought the home and agreed to make payments to the lender, you did so jointly. The lender doesn’t care that you two got divorced. Even though the home was awarded to her, the lender was still looking to both of you for payment. You were both still jointly liable for all the payments that needed to be made on the note even after you divorced.
Her default unfortunately has ruined your credit for years, but there is nothing you can do to change what has happened.
Q: My mother died in 2011. Her house makes up virtually all of her estate, the total value of which is less than $500,000. Are capital gains taxes due when we sell the house?
A: When your mother died, the cost basis of the home was changed to the home’s fair market value on her date of death.
If you sell the home for less than that new cost basis, you won’t owe any capital gains taxes. If you sell it for more than the cost basis, you’ll owe capital gains taxes, but only on the increase in value from your mother’s date of death until the date of sale.