Valuing real estate when separating
LEGAL LOOK AT FAMILY MATTERS
In Nova Scotia when married couples (or unmarried couples registered as a domestic partnership) separate and are not selling all their jointly owned real estate, judges usually order the partner keeping the property to pay the other half the current market value. The Nova Scotia Matrimonial Property Act does not apply to non-registered domestic partnerships, but it is not unusual to apply similar principles to value any jointly held real estate.
Most Nova Scotia cases also allow for shareable deductions from the current value ( “notional disposition costs”) even if the party keeping the property has no immediate intentions of selling it. Notional disposition costs include the estimated cost of real estate commission and legal fees that would be paid if the property was sold, costs to migrate title into the computer registry system if migration hasn’t already occurred and all applicable HST. If the property would attract capital gains tax if sold, a deduction for estimated capital gains may also be applied.
Disagreement on real estate values slows down settlement negotiations and/or increases Court time and without agreement on current value, one cannot calculate/negotiate the deductions for notional disposition costs.
Sometimes one or both parties want to use a tax assessment, mortgage appraisal or realtor’s opinion to establish current value, but judges are most persuaded by market valuations done by qualified appraisers.
Mortgage appraisals are based on the lender’s criteria. Generally they want appraisers to give a conservative market value to ensure maximum debt recovery if there is a foreclosure, so mortgage appraisals are usually lower than current market value.
Tax assessments are rarely based on actual property inspections. They may reflect estimated market value increases if an improvement required a building permit, but won’t reflect unpermitted improvements (interior flooring upgrades, etc.) unless an assessor was made aware of these. Tax assessments also lag behind current market conditions. 2019 residential assessments are based on the physical state of the property as of Dec. 1, 2018 and the market value as of Jan. 1, 2018.
Realtors may or may not inspect a property before giving an opinion. While they may have a good sense of local market conditions they are not formally trained appraisers and often their opinion letters contain little information about how they calculated market value.
Market valuations done by trained appraisers follow industry-specific guidelines. These appraisers view and document the property’s interior and exterior condition and compare it to other similar properties. They use this and other information to give an opinion on current fair market value. That said, appraising property is an “art not a science” with room for legitimate differences of opinions. I generally advise clients not to be surprised by a 10 per cent — 15 per cent difference between valuations, but even “splitting the difference” between competing market valuations (as judges often do) is usually the best way to establish value for negotiations and/or Court.
Without a good sense of current market value the party purchasing the other’s interest in a property may be paying too much or too little. Market valuations are relatively inexpensive especially considering that real estate is often one of a couple’s most significant assets and are a very useful settlement tool.