Divorce is never something you plan on, and it’s far from a pleasant experience. But it does happen, and the divorce process is usually complicated and sometimes ugly, especially when it comes to real estate assets. Our homes have quickly gained value over the past few years in Canada. In some households they are far and away the largest asset on our personal balance sheets. In some cases, these homes represent the majority of our retirement savings. Certainly, you should hope for and work toward the best and most amicable outcome, but you should also prepare for the worst – if, that is, you want to protect your assets. Protecting Real Estate Assets During Divorce In Alberta can be complicated, and it does depend on the province in which you reside. With that in mind, we offer these 3 tips for protecting your Alberta real estate assets when going through a divorce, especially when it ends in the sale of the home.
1. Take the Necessary First Steps
Emotions run high during a divorce, but you need a clear head, so take the necessary steps that will allow you to proceed logically and rationally. Here, then, are some preparatory steps you should take early on to protecting real estate assets during divorce In Alberta . . .
Prepare Before Filing
You need to keep in mind that everything is divisible during a divorce settlement. Take measures before filing a divorce to protect what you can, and gather key evidence supporting any claims you intend to make in court. Know ahead of time that this is tedious work, but in order to have the most favorable outcome being prepared will be necessary.
Inventory Non-Marital Assets
Take the time to compile a thorough list of all property you acquired before the marriage and gather all the supporting evidence and documentation. Most people don’t file away receipts from what is purchased, but credit card statements can help. For larger items it may be worth reaching out to retailers to see if they can pull of transactions based on a profile you have set up, or your credit card number. If protecting real estate assets during divorce in Alberta is a priority for you, and you want a general overview of managing finances through this situation, then the above link will help. This means collecting your real estate records before your spouse hands you the divorce.
Get an Accurate Valuation of Your Real Estate Assets
Most people tend to forget the implication of tax on investment, such as deferred tax payment on retirement accounts. An early withdrawal could also come with a penalty. Put such factors into consideration when appraising the value of property and investments. Help from a tax professional is crucial.
Choose Battles Wisely
The simple fact is that not everything is worth fighting for, especially when you consider mounting lawyer fees. Be sure to weigh the value of the asset against the cost of your lawyers time before making a petition.
Consider Getting a Mediator
Divorces are expensive, and outcomes aren’t always what you desire. Consider using a mediator because this will be far less costly than lawyer fees, and a mediator can help facilitate the divorce agreement. Mediators are an unbiased third party that help divorcing couples reach an agreement faster. They will communicate back and forth with your former partner and help draft your separation agreement. On average a mediator costs $5,000, while litigation can be upwards of $25,000.
2. Implement These Tactics
There are three major things you can do to protect your real estate assets when going through a divorce. They are . . .
Use Equity to Your Advantage
Having negative equity in a real estate asset (when you owe more on the property then what it is worth) doesn’t necessarily protect your assets during a divorce in Canada. It does however effect the way the property is divided and how the debt is handled.
Here Are Some Key Considerations
- Equalization of Net Family Property (NFP): In Canadian divorce law (with the exception of Quebec) property get divided during a divorce by calculating the NFP. This value is reached by taking the value of each spouse’s assets minus liabilities on the date of separation, less their net worth on the date of marriage. So, what do you think happens if one spouse has a negative equity property on their NFP calculation? It gets reduced! This could affect the equalization payment.
- Debt Sharing: Negative equity is classified as a liability. While a home with negative equity may still be regarded as a marital asset, its negative value could lead to the debt being shared between both spouses, depending on how the division of debts is determined.
- Selling the Property: If the property needs to be sold during the divorce, negative equity could result in both spouses sharing the shortfall (unless one spouse agrees to take on the full debt).
- Keeping the Property: One spouse may choose to retain the property despite negative equity. In this case, they might “buy out” the other spouse’s share, but the buyout calculation will factor in the negative equity.
- Intentional Negative Equity: If one spouse intentionally increases negative equity (e.g., through unnecessary refinancing or loans) in an attempt to reduce the NFP, courts may see this as bad faith. Judges have discretion to adjust for this and ensure fairness. Proceed with caution and always consult your lawyer.
- Protection from Creditors: Negative equity itself does not protect real estate from creditors or divorce proceedings. Courts will still evaluate the property’s equity (or lack thereof) and include it in the division process.
Consult a Lawyer:
Family law and property division can be complex. A family lawyer or financial advisor specializing in divorce can help you assess your situation and protect your financial interests while complying with provincial laws.
Prove Assets Are Premarital
Assets in a marriage are considered part of the marital estate unless you can prove that they are non-marital assets. “For real estate acquired before the marriage, you need to prove that any loans associated with the asset were cleared before you got into the marriage.” If you don’t do this, the court could pre-determine that “the asset has only partial non-marital value.”
Consider Setting up a Land Trust
Any real estate assets you acquired before the marriage can be put into a land trust. This will protect the assets from creditors and litigators, and it “can protect you from losing your property during divorce.”
Here’s how it works . . .
“A land trust offers protection by maintaining your privacy with regards to ownership of real estate. The land trust will be the legal owner of the estate, and your name will not appear in any public records that identify property ownership. Only the trust name will exist.”
3. The Process of Selling Real Estate Assets in a Divorce
Sometimes in a divorce, both parties agree to sell the property and then split the proceeds. In this case, there are some things you need to do to protect your portion of the real estate assets.
Set an Asking Price
Pricing appropriately for a sale and in line with market value is critical for selling real estate. That’s why it’s highly recommended that you work closely with a local agent who knows the local market well. To consult a Alberta agent about pricing, just call (403) 383-6592.
Prepare for Showings
“Getting the house ready can be the most difficult part of the sale process. There’s often some work that needs to be done – minor repairs, painting, and the like – before the house is ready to be shown, so you need to agree on where the money for that will come from. If both of you have moved out by the time you put the house on the market, you can leave the place to be staged by the agent.”
Review Offers
When offers from potential buyers begin to come in, you’ll have to work together to review them. The problem that arises in a divorce is that people typically just want to get it over with as soon as possible and, as a result, often accept a less than desirable offer. So, again, be sure to lean on your agent’s expertise when reviewing offers.
Divide the Proceeds
The last step in the process will be dividing the proceeds of the sale. “In general, that shouldn’t be too complex – the escrow company can distribute the money, after paying off all the obligations on the house and making whatever other payments you’ve agreed to.”
Usually, the only difficulty that arises here is when “one spouse has been making post-separation mortgage payments, that spouse has probably been reducing the principle amount and increasing the equity, which may increase the amount to be divided between the spouses after the closing costs and obligations have been paid. The distribution should be adjusted to account for the paying spouse’s contribution.”
An Important Aspect of Protecting Real Estate Assets
If you and your spouse/ex-spouse decide to sell property, you’ll likely come out far ahead by working with an experienced Alberta investor. They will have knowledge of the local market and will be able to keep a cool head in order to get you the best deal possible. If your goal is to protect your Alberta real estate assets when going through a divorce, be sure to contact us today at (403) 383-6592.