Property Settlement Notes in Divorce
Jody Bruns, CDLP, CMMU®
Property Settlement Note – a deferred payment in property settlement used to equalize property.
- Used to equalize property
- Not taxable to recipient
- Does not survive bankruptcy
Very often when divorcing couples negotiate the terms and conditions of a property settlement, they agree to a structured settlement, which is a series of smaller payments paid over time, as opposed to a lump-sum payment. In this routine, a series of payments over a period of time comes to more than the agreed upon settlement sum because the recipient normally receives interest to compensate for the delayed payment.
A property settlement note is not taxable to the recipient because the IRS says that the transfer of property in a marriage is not taxable and in this scenario, the property settlement note is still a division of property. However, any interest earned and paid as a term of the property settlement note is taxable income.
A property settlement note does not survive bankruptcy. Therefore, if the husband owns his own business worth $2M and the wife is receiving a property settlement note of $1M for the value and the husband drives the business into the ground and files bankruptcy, the wife may lose her income from the property settlement note.
If you have divorcing clients and part of the income needed for qualifying for a mortgage loan consists of income from a property settlement note, the borrower MUST SHOW 12 MONTHS RECEIPT of this income as well as 3 YEARS CONTINUANCE from the date of application. Another prime example of how not all income is considered qualified income in the mortgage world.
If you are working with divorcing clients, please make sure they are working with a mortgage professinal who specializes in the divorce lending market. It is definitely not the same as traditional mortgage lending.
I would be honored to help you and your divorcing clients explore their options and avoid hurdles with their mortgage financing!
Have a great weekend............ Jody