Divorce & Real Estate in Hawaii

Divorce in Hawaii: Navigating Real Estate Issues

Divorce is an emotionally challenging and complex process, and one of the most significant financial assets often involved is real estate. In Hawaii, the division of property, including homes, land, and other real estate, requires careful consideration and can be a major point of contention. Whether you're going through a divorce in Hawaii or assisting a client who is, understanding how real estate is handled in these proceedings is essential for a smooth and fair outcome.

In this post, we'll walk through the key real estate issues that arise during divorce in Hawaii, and how you can navigate them to ensure a fair and equitable division of property.

1. Hawaii's Equitable Distribution System

Unlike some states that follow community property laws, Hawaii follows an equitable distribution system when it comes to dividing marital assets in a divorce. This means that the court will divide marital property fairly, but not necessarily equally. The goal is to ensure that the distribution of property is just, based on a variety of factors.

When it comes to real estate, the court will consider:

• The length of the marriage: Longer marriages tend to result in a more even distribution of property.

• The contributions of each spouse: Whether financial or non-financial (e.g., homemaking or caring for children), both spouses' contributions to the acquisition and maintenance of property will be taken into account.

• Economic circumstances: The court will assess each spouse’s financial situation post-divorce, including their earning potential and whether they have the ability to maintain or afford a property.

• Custody arrangements: If children are involved, the court may consider the stability of the home environment when determining which spouse keeps the marital home.

2. Marital vs. Separate Property

The first step in understanding how real estate will be divided is determining whether the property is classified as marital property or separate property:

• Marital Property: In Hawaii, any real estate purchased or acquired during the marriage is generally considered marital property, even if only one spouse's name is on the deed. This includes the family home, investment properties, and vacation homes.

• Separate Property: Properties owned by either spouse before the marriage, or property acquired by inheritance or as a gift during the marriage, may be classified as separate property. However, this can become complicated if separate property was used in any way to improve or finance marital property (for example, if separate property was sold to pay for renovations to the marital home). In such cases, the separate property may be treated as marital property, at least partially.

3. The Family Home: Stay or Sell?

For many divorcing couples in Hawaii, the family home is not only a financial asset but an emotional one. Deciding what to do with the home can be one of the most difficult decisions in the divorce process.

Here are the most common options:

1. Sell the Property

In many cases, both spouses agree to sell the family home and divide the proceeds. This option may make the most sense if neither party has the means to buy the other out, or if both spouses want to move on to new living arrangements. The sale process can be relatively straightforward, but it is still important to ensure that the property is sold for its fair market value.

2. Buyout

In situations where one spouse wants to stay in the family home, a buyout may be the best option. The spouse staying in the home buys out the other spouse’s share of the property. The amount is typically determined based on the current market value of the property, and may also include any outstanding mortgage balance.

For example, if the home is worth $600,000 and there is a $200,000 mortgage, the spouse buying out the other would need to pay their half of the equity, which in this case would be around $200,000. This buyout can be structured through a combination of cash and other assets (such as retirement accounts or investments).

3. Keep the Property and Co-Own

In some cases, especially when children are involved, divorcing spouses may decide to temporarily keep the property and co-own it. This allows the children to stay in the family home while both parents retain ownership, but it’s a more complicated arrangement and may require a clear agreement about maintenance, expenses, and eventual sale.

4. Valuation and Appraisal of Real Estate

One of the first steps in the real estate division process is to determine the value of the property. This is typically done by hiring a licensed real estate appraiser who will assess the market value of the property based on comparable sales in the area, the condition of the property, and other relevant factors.

A fair appraisal is critical, especially in contentious divorce situations where one party may disagree with the value. Both spouses may want to hire their own appraisers or use a neutral third-party appraiser to avoid disputes over property value.

5. Dealing with Mortgage Debt

Real estate often comes with mortgages, and when a divorce is finalized, these debts must be handled as well. The division of the mortgage debt will be part of the overall property division.

• Refinancing the Mortgage: If one spouse will be staying in the family home, they may need to refinance the mortgage in their name only. This ensures that the other spouse is removed from the mortgage obligation. However, this can be difficult if the spouse staying in the home doesn’t qualify for refinancing based on their income.

• Assumption of Debt: In some cases, the spouse who is staying in the home may also assume the mortgage debt as part of the buyout process. This should be clearly outlined in the divorce settlement, and both spouses should be aware of their financial responsibilities.

6. Tax Implications of Real Estate Division

Divorce and real estate transactions can have tax consequences that should be carefully considered. Some important tax aspects include:

• Capital Gains Tax: If real estate is sold during the divorce, capital gains taxes could apply. However, Hawaii allows for a primary residence exemption, meaning that a couple can exclude up to $500,000 in capital gains from the sale of their primary residence if they meet certain criteria.

• Property Transfer Taxes: Hawaii imposes a conveyance tax on the transfer of real property, which may be applicable during divorce proceedings, especially when the property is sold or transferred between spouses. However, transfers of real estate between spouses as part of a divorce may be exempt from the conveyance tax.

• Mortgage Debt Relief: If the property is transferred to one spouse and the other spouse is relieved of mortgage debt, there may be potential tax consequences. Consulting a tax advisor is important to ensure both parties understand the financial impact.

7. Special Considerations for Hawaii Real Estate

Hawaii’s unique geography and laws around property ownership may add complexity to real estate division during a divorce:

• Leasehold Properties: Much of the real estate in Hawaii is leasehold property, meaning the land is leased from a government or private trust, rather than owned outright. This can affect property values and the transfer process, so it’s important to involve a professional who understands leasehold agreements.

• Cultural and Family Property: Hawaii has a deep cultural connection to the land, and sometimes properties hold emotional or family significance. These factors can complicate the division of real estate, especially when family heirloom properties or properties passed down through generations are involved.

Conclusion

Real estate division in a Hawaii divorce can be a complicated and emotionally charged process, but understanding the laws and options available can help you make informed decisions. Whether you're selling the family home, buying out your spouse's share, or navigating the complexities of tax and mortgage issues, it’s essential to work closely with legal, financial, and real estate professionals who specialize in divorce matters.

If you're going through a divorce in Hawaii, make sure to consult with an experienced divorce lawyer and a knowledgeable real estate agent to help you understand your rights and options. With the right support, you can navigate the real estate issues of divorce and begin your next chapter with confidence.