6 Steps to Preparing For Divorce

Divorce rates are on the rise, as pandemic stress takes its toll on relationships. Here's how to prepare if you're considering a divorce.

The pandemic has tested all of us in countless ways, at work, at home, and in our marriages and partnerships. Nearly one third of couples — 31 percent — say that the COVID has negatively impacted their relationships, and the US has seen divorce rates “skyrocket” during the pandemic. And although things are tough right now, no matter when you consider ending your marriage, divorce is a huge decision, with significant personal and financial implications, explains Sharon Klein, family wealth expert for the Wilmington Trust, Eastern Region. “It is especially critical for women who have not had financial experience to have skilled advisors to educate them and guide the decision-making process,” Klein says. 

If you’re considering filing for divorce this year, pay close attention to these six tips in order to make the process as seamless — and hopefully as painless — as possible. 

BUILD YOUR TEAM 

One of the first and most crucial steps in preparing for divorce is to build a team you trust, says Tessa Elrod, co-owner of Next Step Financial Transitions and Next Step Divorce Solutions. 

“Start to think about the team that you want to build,” Elrod says. 

Elrod recommends meeting with a therapist in order to manage the emotional effects of going through a divorce, consulting with a local CDFA, and meeting with a local family law attorney or mediator.  

“A trusted team of experts, which typically includes a matrimonial attorney, a trusts and estates attorney and a financial advisor, can make the divorce process less daunting,” Klein says.

GET EDUCATED 

If you do not manage the finances in your household, it is important to make sure you develop an understanding of your assets and liabilities so that you can be as informed as possible after you consider and decide to go through with the process of a divorce. 

Elrod recommends gaining a better understanding of how much money you have as well as the cost of living in your area. Knowing your financial situation well will ultimately help you to more seamlessly go through your divorce. 

REVIEW YOUR EXPENSES

Beyond gaining an overall knowledge of your financial situation, it is vital that you understand your expenses when going through a divorce. Comparing your expenses to the amount of money you will be getting from your settlement will help you build your financial future. 

“An important step in the divorce process is projecting how a proposed settlement will sustain a woman’s lifestyle, whether she’s receiving a lump-sum payment or regular payments,” Klein says. “This includes accounting for additional expenses for children, such as summer camp, college tuition and future education funding, hobbies, etc.” 

UPDATE DOCUMENTS 

Elrod recommends that her clients make sure that they have paper copies of different financial documents while considering a divorce. 

“I tell them to put on their private detective hat and think outside the box on where they can access information if they don’t have access to it because they’ve been forcibly locked out,” Elrod says. 

Klein offers similar advice, and suggests performing a review of various documents, including estate planning documents and beneficiary designations.

“While some planning might have to wait until the divorce decree is final, documents such as wills, powers of attorney and health care directives, can and should generally be updated while divorce is pending, so a soon-to-be ex-spouse inherits the minimum possible and is not in a position to make important financial and health care decisions for you,” Klein says. 

GET A BANK ACCOUNT IN YOUR OWN NAME 

Especially if you have never managed your finances before, it is crucial to open a bank account in your own name in order to improve your financial future. 

“Women should open accounts in their individual names so they have cash available, and they might need to establish or improve credit,” Klein says.  

REVIEW PRENUPTIAL AGREEMENTS 

If you have a prenuptial agreement, it is necessary to conduct a review of it before going through with your divorce so that you have a better understanding of the benefits and limitations of the document.  

“If women have an existing prenuptial agreement, they should carefully review the agreement with an advisor to see what rights – and obligations – are incorporated,” Klein says. 

Going through a divorce is a challenging and highly personal thing. These tips will help you to stay grounded and as informed as possible throughout the process.

REMEMBER, WE’RE WITH YOU

You’re going through a huge life change, and you’ve got a list of things to do, but you’ve 100% got this, and we’re with you every step of the way. Join us in the HerMoney Facebook group. We’re thousands strong. And we’re talking about everything.

READ MORE: 

• From Navigating A Divorce To Grocery Budgeting Tips, The Best Advice From The Women Of The HerMoney Facebook Group

• 5 Tax Filing Tips for the Divorced

• 6 Tips for Stay-at-Home Moms Starting Over After a Divorce

• How to Get Divorced — and Protect Your Finances

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For the first time since July, mortgage rates pass 3%

Rise in mortgage rates over the next couple of months is likely to be more muted.

The average mortgage rate for a 30-year fixed loan rose 5 basis points last week to 3.02%, marking the first time since July that the industry has seen rates break above 3%, according to Freddie Mac’s Primary Mortgage Market Survey.

Since reaching a low point in January, mortgage rates have risen by more than 30 basis points as the economy works to recover, and according to Sam Khater, Freddie Mac’s chief economist, the impact on purchase demand has been noticeable.

“While purchase activity remains high, it has cooled off over the last few weeks and is currently on par with early March, prior to the pandemic,” Khater said. “However, the rise in mortgage rates over the next couple of months is likely to be more muted in comparison to the last few weeks, and we expect a strong spring sales season.”

After an arctic storm left purchase applications sluggish, mortgage activity bounced back last week almost immediately despite rising rates.

“The housing market is entering the busy spring buying season with strong demand,” Joel Kan, the Mortgage Bankers Association’s associate vice president of economic and industry forecasting, said. “Purchase applications increased, with a rise in government applications – likely first-time buyers – pulling down the average loan size for the first time in six weeks.”

Throughout the pandemic-induced recession, now a year old, the Federal Reserve has stated that the housing market has been one of the only persistent bright spots. However, much of that strength has piggybacked on the industry’s historically low interest rates, and left some economists worried that the rapid rise in Treasury yields in the last several weeks risk choking off that activity.

The 10-year U.S. Treasury note, a heavy-hitter in the swing of mortgage rates, has risen by half a percentage point since January, now teetering near 1.4%.

However, Logan Mohtashami, HousingWire’s lead analyst, sees this as push in the right direction.

“Last year I talked about how the 10-year yield should stay at a range between 1.33% and 1.60% in 2021,” Mohtashami said. “If we couldn’t do this, something terrible happened with the vaccination process. After we closed above 1.33%, the yield rocketed toward 1.60%; we are in a range between these two levels right now. We are no longer in a recession; this is where the 10-year yield should be.”

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As Featured in West + Main Home Magazine: Exterior Refresh

West + Main agent Cathy Rossano and her family had been putting off this exterior project for a while.

Even though they knew their siding should be replaced, there was always something more fun to tackle....until Stay at Home orders inspired them to get it done.

"Our house tends to have two entirely different temperatures. In March, when my husband started working from home regularly, he was freezing all the time...so we added cellulose insulation into all the walls (they do it from the outside by removing pieces of the siding) on the upper level, and also air sealed the attic. Instead of filling and repainting all the holes that were made during the insulation install we decided to just redo the siding as it was so tired looking."

COST: $22,000 including rebates

"The crew worked so hard that they knocked out the whole house in 2.5 days. They did great work, cleaned up before they left each day and the finished product is even better than we'd hoped. We noticed a huge difference in the temperature upstairs right away and our cooling bill is running about $40 less per month- in the middle of a really hot summer!" 

For more remodel inspiration, visit the first edition of the West + Main Home Magazine.

How Much Is Capital Gains Tax on Real Estate? Plus: How To Avoid It

Capital gains tax is the income tax you pay on gains from selling capital assets—including real estate. So if you have sold or are selling a house, what does this mean for you?

If you sell your home for more than what you paid for it, that's good news. The downside, however, is that you probably have a capital gain. And you may have to pay taxes on your capital gain in the form of capital gains tax.

Just as you pay income tax and sales tax, gains from your home sale are subject to taxation.

Complicating matters is the Tax Cuts and Jobs Act, which took effect in 2018 and changed the rules somewhat. Here's what you need to know about all things capital gains:

What is capital gains tax—and who pays it?

In a nutshell, capital gains tax is a tax levied on possessions and property—including your home—that you sell for a profit.

If you sell it in one year or less, you have a short-term capital gain.

If you sell the home after you hold it for longer than one year, you have a long-term capital gain. Unlike short-term gains, long-term gains are subject to preferential capital gains tax rates.

What about the primary residence tax exemption?

Unlike other investments, home sale profits benefit from capital gains exemptions that you might qualify for under some conditions, says Kyle White, an agent with Re/Max Advantage Plus in Minneapolis–St. Paul.

The IRS gives each person, no matter how much that person earns, a $250,000 tax-free exemption on capital gains from a primary residence. You can exclude this capital gain from your income permanently.

"So if you and your spouse buy your home for $100,000, and years later sell for up to $600,000, you won't owe any capital gains tax," says New York attorney Anthony S. Park. However, you do have to meet specific requirements to claim this capital gains exemption:

• The home must be your primary residence.

• You must have owned it for at least two years.

• You must have lived in it for at least two of the past five years.

• You cannot have taken this exclusion in the past two years.

If you don't meet all of these requirements, you may be able to take a partial exclusion for capital gains tax if you meet certain exceptions (e.g., if your job forces you to move before you live in the home two years). For more information, consult a tax adviser or IRS Publication 523.

What's my capital gains tax rate?

For capital gains over that $250,000-per-person exemption, just how much tax will Uncle Sam take out of your long-term real estate sale? Under the new tax law, long-term capital gains tax rates are based on your income (pre-2018 it was based on tax brackets), explains Park.

Let's break it down.

For single folks, you can benefit from the 0% capital gains rate if you have an income below $40,000 in 2020. Most single people will fall into the 15% capital gains rate, which applies to incomes between $40,001 and $441,500. Single filers with incomes more than $441,500, will get hit with a 20% long-term capital gains rate.

The brackets are a little bigger for married couples filing jointly, but most will get hit with the marriage tax penalty here. Married couples with incomes of $80,000 or less remain in the 0% bracket, which is great news. However, married couples who earn between $80,001 and $496,600 will have a capital gains rate of 15%. Those with incomes above $496,600 will find themselves getting hit with a 20% long-term capital gains rate.

• Your tax rate is 0% on long-term capital gains if you're a single filer earning less than $40,000, married filing jointly earning less than $80,000, or head of household earning less than $53,600.

• Your tax rate is 15% on long-term capital gains if you're a single filer earning between $40,000 and $441,500, married filing jointly earning between $80,001 and $486,600, or head of household earning between $53,601 and $469,050.

• Your tax rate is 20% on long-term capital gains if you're a single filer, married filing jointly, or head of household earning more than $496,600. For those earning above $496,600, the rate tops out at 20%, says Park.

Don't forget, your state may have its own tax on income from capital gains. And very high-income taxpayers may pay a higher effective tax rate because of an additional 3.8% net investment income tax.

If you held the property for one year or less, it's a short-term gain. You pay ordinary income tax rates on your short-term capital gains. That's the same income tax rates you would pay on other ordinary income such as wages.

Do home improvements reduce tax on capital gains?

You can also reduce the amount of capital gains subject to capital gains tax by the cost of home improvements you've made. You can add the amount of money you spent on any home improvements—such as replacing the roof, building a deck, replacing the flooring, or finishing a basement—to the initial price of your home to give you the adjusted cost basis. The higher your adjusted cost basis, the lower your capital gain when you sell the home.

For example: if you purchased your home for $200,000 in 1990 and sold it for $550,000, but over the past three decades have spent $100,000 on home improvements. That $100,000 would be subtracted from the sales price of your home this year. Instead of owing capital gains taxes on the $350,000 profit from the sale, you would owe taxes on $250,000. In that case, you'd meet the requirements for a capital gains tax exclusion and owe nothing.

Take-home lesson: Make sure to save receipts of any renovations, since they can help reduce your taxable income when you sell your home. However, keep in mind that these must be home improvements. You can't take a deduction from income for ordinary repairs and maintenance on your house.

How the tax on capital gains works for inherited homes

What if you're selling a home you've inherited from family members who've died? The IRS also gives a "free step-up in basis" when you inherit a family house. But what does that mean?

Let's say Mom and Dad bought the family home years ago for $100,000, and it's worth $1 million when it's left to you. When you sell, your purchase price (or "basis") is not the $100,000 your folks paid, but instead the $1 million it's worth on the last parent's date of death.

You pay capital gains tax only on the difference between what you sell the house for, and the amount it was worth when your last parent died.

What if I have a loss from selling real estate?

If you sell your personal residence for less money than you paid for it, you can't take a deduction for the capital loss. It's considered to be a personal loss, and a capital loss from the sale of your residence does not reduce your income subject to tax.

If you sell other real estate at a loss, however, you can take a tax loss on your income tax return. The amount of loss you can use to offset other taxable income in one year may be limited.

How to avoid capital gains tax as a real estate investor

If the home you're selling is not your primary residence but rather an investment property you've flipped or rented out, avoiding capital gains tax is a bit more complicated. But it's still possible. The best way to avoid a capital gains tax if you're an investor is by swapping "like-kind" properties with a 1031 exchange. This allows you to sell your property and buy another one without recognizing any potential gain in the tax year of sale.

“In essence, you're swapping one investment asset for another,” says Re/Max Advantage Plus' White. He cautions, however, that there are very strict rules regarding timelines and guidelines with this transaction, so be sure to check them with an accountant.

If you’re opting out of the rental property investment business and putting your money in another venture that does not qualify for the 1031 exchange, then you’ll owe the capital gains tax on the profit.

For more smart financial news and advice, head over to MarketWatch.

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Millennials are driving US home sales

Experts see even better days ahead as inventory returns in spring

Existing home sales rose for the second consecutive month, as January saw a seasonally-adjusted annual rate of 6.69 million purchases – up a robust 23.7% year-over-year. You can thank Millennials for that.

Lawrence Yun, chief economist for the National Association of Realtors, said last month that he expected momentum to carry over from the end of 2020. He was right, as January’s numbers were up 0.6% from December.

A total of 5.64 million homes were sold in 2020, up 5.6% from 2019 and the most since before the Great Recession.

“Sales easily could have been even 20% higher if there had been more inventory and more choices,” Yun said. “Home sales continue to ascend in the first month of the year, as buyers quickly snatched up virtually every new listing coming on the market.”

The housing industry was a bright spot throughout 2020 and has remained so in the early part of 2021 as the nation continues to battle the COVID-19 pandemic and economic fallout. Yun said the continued vaccine rollout and financial stimulus from President Joseph Biden’s American Rescue Plan will only aid in more home sales – which will in turn prop up the economy even more.

Charlie Oppler, NAR president, said the company is “prepared and eager” to help families and neighbors secure housing in 2021. Distressed sales – foreclosures and short sales – represented less than 1% of sales in January, equal to December’s percentage but down from 2% in January 2020.

“NAR is working to close the racial homeownership gap, secure equal access to housing for all Americans and address housing affordability issues plaguing communities across the country,” Oppler said.

Yun predicts existing-home sales will reach at least 6.5 million in 2021 – even with mortgage rates likely to inch higher due to the rising budget deficit and higher inflation.

“The housing outlook looks solid for this year,” Yun said.

Total housing inventory at the end of January was 1.04 million units, down 1.9% from December and down 25.7% from one year ago. Unsold inventory sits at a 1.9-month supply at the current sales pace, equal to December’s supply and down from the 3.1-month amount recorded in January 2020. Properties typically remained on the market for 21 days in January, seasonally even with December 2020 and down from 43 days in January 2020. Over 70% of the homes sold in January 2021 were on the market for less than a month.

Low inventory remains an enormous problem for the industry, especially with mortgage rates hanging below 3%. But experts agree better days are ahead, with more homeowners expected to move during the warmer months.

“The constraining factor is supply, though that should ease this spring,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Rising prices remain a big barrier to homeownership for many, with the median price up a record 14.1 percent from a year ago. While home building is accelerating, we can expect demand exceeding supply at least until next year.”

Younger-aged homebuyers are expected to continue to pack the market this year, especially with the possible passage of Biden’s $15,000 tax credit for first-time homebuyers.

“We expect a significant portion of purchase demand in the coming years to be driven by millennials and the younger-age cohorts,” said Joel Kan, Mortgage Bankers Association associate vice president of economic and industry forecasting. “Despite scarce inventory levels in the entry-level portion of the market, first-time buyers represented a third of sales last month.”

First-time homebuyers were responsible for 33% of home sales in January, up from 31% in December 2020 and from 32% in January 2020.

Single-family home sales rose at a seasonally-adjusted annual rate of 5.93 million in January, up 0.2% from 5.92 million in December, and up 23.0% from one year ago. The median existing single-family home price was $308,300 in January, up 14.8% from January 2020.

Existing condominium and co-op sales were recorded at a seasonally-adjusted annual rate of 760,000 units in January, up 4.1% from December and up 28.8% from one year ago. The median existing condo price was $269,600 in January, an increase of 8.6% from a year ago.

“While it continues to mostly be a sellers’ market, the rapid increase in prices and the prospect of more building in the spring gives sellers who might be thinking about changing homes a strong incentive to act now, which might restore some balance to the market,” said John Pataky, executive vice president at TIAA Bank.

Regionally, existing home sales in the Northeast fell 2.2%, rose 1.9% in the Midwest and 3.2% in the South, and fell 4.4% in the West. Unsurprisingly, the median prices of homes in all regions was up from January 2020 – 15.8% in the Northeast, 14.7% in the Midwest, 14.6% in the South, and 16.1% in the South.

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