What Is a Non-QM Loan? Mortgage Options for Self-Employed & Investors
If you’re self-employed, a real estate investor, or someone with unique income sources, you may have run into challenges getting approved for a traditional mortgage. That’s because most loans fall under Qualified Mortgage (QM) guidelines, which have strict requirements around income verification, debt-to-income ratios, and credit history.
But what if your income doesn’t fit into those boxes? That’s where Non-QM loans come in.
What Is a Non-QM Loan?
A Non-Qualified Mortgage (Non-QM) is any home loan that doesn’t meet the standard guidelines set by the Consumer Financial Protection Bureau (CFPB) for Qualified Mortgages.
That doesn’t mean they’re risky or bad—it simply means lenders use alternative methods to verify income and assess risk.
Non-QM loans are designed for borrowers who are financially strong but don’t meet traditional documentation rules.
Who Are Non-QM Loans Designed For?
Non-QM loans are popular with:
- Self-Employed Borrowers: Instead of W-2s, lenders may use bank statements, 1099s, or profit-and-loss statements to verify income.
- Real Estate Investors: Programs like DSCR loans (Debt Service Coverage Ratio) allow approval based on rental income instead of personal income.
- High-Net-Worth Individuals: Asset depletion loans let you qualify by using your investment or savings accounts.
- Borrowers with Credit Challenges: Some Non-QM lenders work with recent credit events like bankruptcy or foreclosure, provided you show financial stability.
Benefits of a Non-QM Loan
- Flexible Income Verification
Instead of W-2s, you can use alternative documents like bank statements or rental income. - Access to More Loan Programs
DSCR, bank statement, and interest-only loans give borrowers creative options that traditional lenders don’t offer. - Opportunity to Scale Investments
Investors can leverage Non-QM programs to grow rental portfolios without the limitations of conventional underwriting. - Credit Flexibility
You may qualify even if you’ve had a credit event in the recent past.
Things to Consider
While Non-QM loans can be a powerful tool, it’s important to understand the trade-offs:
- Higher Interest Rates: Non-QM loans often come with slightly higher rates than conventional mortgages.
- Larger Down Payments: Some programs may require 10–20% down or more, depending on the loan type.
- Lender Variety: Not all lenders offer Non-QM loans, so working with an experienced mortgage professional matters.
The Las Vegas Factor
In a city like Las Vegas, Non-QM loans are especially valuable. With so many self-employed professionals, entrepreneurs, and real estate investors, these programs allow buyers to qualify who might otherwise be turned away by traditional banks.
Whether you’re an Uber driver with fluctuating income, a casino worker earning tips, or an investor buying a short-term rental property, Non-QM programs can provide the financing you need.
Final Thoughts
Non-QM loans open the door for self-employed buyers, investors, and anyone who doesn’t fit the traditional lending mold. They’re flexible, creative, and designed for real-world borrowers.
If you’re in Las Vegas and want to explore your mortgage options, reach out to The Derek Parent Team. With years of experience in Non-QM lending, we’ll help you find the right program—whether it’s a bank statement loan, DSCR loan, or another Non-QM option.
Is Now the Best Time to Buy a High-Rise in Las Vegas?
Las Vegas is known for its luxury condos, Strip views, and vibrant real estate market—and high-rise living remains one of the most attractive lifestyle and investment choices in the city.
But with interest rates fluctuating, home prices adjusting, and inventory levels shifting, many buyers are asking: “Is now really the best time to buy a high-rise in Las Vegas?”
The answer depends on your goals, but let’s break it down.
Why High-Rises Are So Appealing in Las Vegas
High-rise living isn’t just about having floor-to-ceiling views of the Strip—it’s about lifestyle and long-term value. Buyers and investors are drawn to high-rises because:
- Location: You’re close to world-class dining, entertainment, and business centers.
- Amenities: Pools, gyms, valet, concierge, and 24-hour security make it turnkey living.
- Investment Potential: High-rises attract tourists, executives, and second-home buyers.
- Prestige: Towers like Waldorf Astoria, Veer, and Panorama offer exclusivity you won’t find in traditional neighborhoods.
So whether you’re buying for yourself or as an investment, the appeal is undeniable.
Current Market Conditions
The high-rise market in Las Vegas has its own rhythm compared to traditional single-family homes. Here’s what’s happening now:
- Moderating Prices: Prices have leveled after years of strong appreciation, which can mean opportunity for buyers.
- Stable Demand: Professionals, retirees, and investors still see value in condo living, especially in prime locations.
- Interest Rates: While mortgage rates remain higher than the lows of a few years ago, many experts predict modest declines in 2025 and beyond. That means buying now could let you refinance later.
- Inventory: There are more choices today than during peak demand cycles, giving buyers leverage to negotiate.
The Case for Buying Now
There are several reasons why buying a high-rise today could be a smart move:
- Lock in Today’s Price
If rates drop next year, buyer demand will spike again. More buyers = more competition = higher prices. Acting now can help you secure a unit before that rush. - Refinance Potential
You can always refinance if rates go down, but you can’t go back in time and buy the same condo at a lower price once appreciation kicks in. - Lifestyle Benefits Immediately
Beyond numbers, buying now means you get to enjoy the lifestyle right away—Strip views, concierge service, and lock-and-leave convenience. - Negotiation Leverage
With more inventory, sellers may be more open to concessions like closing cost credits or furniture packages.
The Case for Waiting
To be fair, there are reasons some buyers choose to wait:
- Rates Could Improve: A 0.5–1% drop in interest rates could save you hundreds per month.
- Economic Uncertainty: If the broader economy slows, prices could soften further in some towers.
- HOA Considerations: Some buyers like to take extra time to research HOA reserves, rules, and fees before jumping in.
So if your timeline is flexible and you’re not in a rush, waiting to see how the market unfolds may be worth considering.
What Buyers Should Really Focus On
Instead of just asking “when,” the better question might be: “What am I buying for?”
- If it’s a lifestyle purchase: The sooner you buy, the sooner you enjoy it.
- If it’s an investment: Look at rental demand, HOA fees, and long-term appreciation potential more than short-term rate swings.
- If it’s about timing the market: Remember that perfect timing rarely exists. Most successful buyers focus on the long-term, not chasing the exact bottom.
Expert Tip: Financing High-Rises is Different
Not all lenders are comfortable with condo financing—especially in high-rise towers with stricter guidelines. That’s where experience matters.
At The Derek Parent Team, we’ve specialized in high-rise financing for decades. We were the in-house lender at Veer Towers, and we’ve helped buyers close loans in nearly every luxury tower in Las Vegas. We know which properties qualify for conventional loans, which require jumbo financing, and how to navigate complex HOA requirements.
Final Thoughts
So, is now the best time to buy a high-rise in Las Vegas?
- Yes, if: You want to secure today’s prices, enjoy the lifestyle now, and take advantage of future refinancing opportunities.
- Maybe wait, if: You’re strictly focused on rates and are comfortable delaying your purchase for potential savings.
The truth is, high-rise living in Las Vegas has long-term appeal no matter what rates do in the short term. The key is aligning your purchase with your personal goals, lifestyle, and budget.
If you’re considering a high-rise purchase, let’s talk. The Derek Parent Team can walk you through financing options, tower comparisons, and strategies to make your investment as strong as possible.
Summerlin vs. Henderson: Where Should You Buy a Home?
When it comes to buying a home in Las Vegas, two communities often stand out: Henderson and Summerlin. Both offer desirable neighborhoods, quality schools, and access to great amenities, but they cater to slightly different lifestyles.
So, if you’re a homebuyer wondering which is the better fit, let’s break down the differences between Henderson and Summerlin to help you decide.
Henderson: Suburban Comfort Meets Convenience
Henderson consistently ranks as one of the safest cities in America, and it’s a favorite for families and retirees because it offers a true suburban feel without being far from the action of the Strip.
Why Buyers Choose Henderson
- Family-Friendly Atmosphere: With top-rated schools, parks, and sports programs, Henderson is one of the most family-oriented communities in Southern Nevada.
- Affordable Options: While home prices are rising, Henderson still offers more affordability compared to some Summerlin neighborhoods.
- Outdoor Lifestyle: Residents enjoy close access to Lake Mead, hiking trails, and golf courses. The Henderson Multigenerational Center and numerous parks create a strong community vibe.
- Convenience: Henderson is home to shopping centers, restaurants, and medical facilities, so you rarely have to leave the area for everyday needs.
Who It’s Best For
Henderson is ideal for families who want safe neighborhoods and space to grow, retirees looking for quiet living, and buyers who value affordability without sacrificing amenities.
Summerlin: Master-Planned Living in Style
On the west side of the valley, Summerlin is one of the most prestigious master-planned communities in the U.S. Known for its design, luxury, and access to Red Rock Canyon, Summerlin feels like its own city within Las Vegas.
Why Buyers Choose Summerlin
- Master-Planned Perfection: Summerlin is divided into villages, each with its own character, parks, and community centers. It’s designed for walkability and convenience.
- Top Schools: Many of the valley’s best public and private schools are located in Summerlin, making it a strong choice for families.
- Luxury Living: From guard-gated communities to golf course homes, Summerlin offers some of the most upscale real estate in Southern Nevada.
- Outdoor Access: With miles of walking trails and immediate access to Red Rock Canyon, it’s perfect for buyers who want to mix suburban life with outdoor adventure.
- Entertainment & Shopping: Downtown Summerlin provides dining, retail, and events all in one hub, so residents never feel far from activity.
Who It’s Best For
Summerlin appeals to professionals, families, and luxury buyers who want a polished, master-planned community with high-end amenities and long-term value.
Henderson vs. Summerlin: Side-by-Side Comparison
| Feature | Henderson | Summerlin |
| Home Prices | Generally more affordable | Higher, especially in luxury areas |
| Schools | Highly rated | Some of the best in Las Vegas |
| Lifestyle | Suburban, family-focused | Upscale, master-planned |
| Outdoor Access | Lake Mead, golf courses, parks | Red Rock Canyon, walking trails |
| Commute | Closer to airport & Strip (15–20 min) | 20–30 min to Strip, but more secluded |
Which Community Is Right for You?
Choosing between Henderson and Summerlin comes down to lifestyle and budget:
- Choose Henderson if you want a suburban atmosphere, affordability, and proximity to Lake Mead or the Strip. It’s especially great for families and retirees.
- Choose Summerlin if you’re looking for luxury homes, master-planned communities, and easy access to outdoor adventures at Red Rock Canyon. It’s best for buyers who want long-term value and upscale living.
Both Henderson and Summerlin offer excellent quality of life, so you really can’t go wrong—it’s just about which community aligns better with your goals.
Final Thoughts
Whether you fall in love with Henderson’s family-friendly neighborhoods or Summerlin’s master-planned luxury, both communities represent some of the best real estate opportunities in Southern Nevada.
If you’re ready to explore your options, connect with The Derek Parent Team. With years of experience helping buyers in both Henderson and Summerlin, we’ll guide you through the financing process and make sure you find the right home in the right community.
First-Time Homebuyer Guide: Buying a Home in Las Vegas
Buying your first home is one of the biggest milestones of your life, and in a city like Las Vegas—where the real estate market moves quickly, neighborhoods each offer a unique lifestyle, and financing options can feel overwhelming—it’s important to have the right guidance.
This guide will walk you through everything you need to know as a first-time homebuyer in Las Vegas. From preparing your finances to choosing the right neighborhood, you’ll see the steps that make your purchase smoother and more successful.
Why Las Vegas is a Great Place for First-Time Buyers
Las Vegas isn’t just the “Entertainment Capital of the World.” Over the last decade, it has grown into a thriving city with family-friendly communities, expanding job opportunities, and a strong real estate market. Here’s why first-time buyers are drawn to Vegas:
- Affordability Compared to Other Major Cities: Prices have risen, but Las Vegas is still more affordable than many coastal markets like Los Angeles or San Francisco.
- No State Income Tax: Nevada has one of the most tax-friendly environments, so homeowners keep more of their income.
- Variety of Communities: You can choose a modern condo on the Strip, a new build in Summerlin, or a quiet neighborhood in Henderson—because the city has something for everyone.
- Strong Job Market: With tourism, technology, and logistics industries growing, the local economy provides stability for homeownership.
Step 1: Prepare Your Finances
Before you start shopping for homes, it’s important to take an honest look at your finances, because being prepared will make the process less stressful.
Check Your Credit Score
Your credit score plays a big role in determining what kind of mortgage you qualify for and the interest rate you’ll receive. Aim for a score of 620 or higher, but some loan programs can work with lower scores.
Save for a Down Payment
Traditionally, buyers put down 20%, but in today’s market, first-time homebuyers have more flexible options:
- FHA loans can require as little as 3.5% down.
- VA loans (for veterans and military families) often require no down payment.
- Conventional loans may allow for 3–5% down.
Get Pre-Approved for a Mortgage
Pre-approval not only shows sellers you’re serious, but it also gives you a clear picture of your budget. A local lender like The Derek Parent Team can walk you through the process and help you choose the right loan for your situation.
Step 2: Understand the Las Vegas Market
The Las Vegas housing market can be competitive, and prices vary depending on location, amenities, and demand.
- Entry-Level Homes: Many first-time buyers start with townhomes or smaller single-family houses.
- New Construction: Builders in Summerlin, North Las Vegas, and Henderson often offer incentives like closing cost assistance, so these can be a great option.
- High-Rise Condos: If you love city living, high-rises near the Strip offer luxury amenities but often come with HOA fees.
Because the market changes quickly, it’s smart to work with a professional who can help you set realistic expectations. You might face multiple-offer situations, so being prepared will give you an advantage.
Step 3: Choose the Right Neighborhood
Las Vegas is made up of diverse communities, and each has its own lifestyle. Here are a few popular areas for first-time buyers:
- Summerlin: Known for its master-planned communities, great schools, and parks. It’s perfect for families and professionals.
- Henderson: Offers a suburban feel with access to Lake Mead, shopping, and family-friendly neighborhoods.
- North Las Vegas: More affordable options with newer builds and expanding amenities, so it’s ideal if you’re looking for value.
- Southwest Las Vegas: Up-and-coming with plenty of new construction and easy access to the Strip.
Think about your lifestyle and priorities. Do you want to be close to work, or do you prefer quiet streets? Do you need great schools, or are amenities more important? Your answers will help narrow your search.
Step 4: Work with the Right Real Estate and Mortgage Professionals
Buying your first home can feel overwhelming, but you don’t have to do it alone. Having a trusted team by your side makes all the difference.
- Realtor: Helps you find properties, negotiate offers, and guide you through closing.
- Mortgage Lender: Assists with financing options, pre-approvals, and making sure your loan closes smoothly.
- Home Inspector: Ensures your home is in good condition before you buy.
At The Derek Parent Team, we specialize in helping first-time buyers navigate financing options in the Las Vegas market. Because we’ve been in the industry for decades, we know how to make the process simple and stress-free.
Step 5: Make an Offer
Once you’ve found the right home, it’s time to make an offer—and strategy is everything.
- Be Competitive: In a hot market, lowball offers often get rejected.
- Include a Strong Pre-Approval Letter: This reassures the seller you’re financially ready.
- Consider Seller Incentives: Builders and sellers sometimes offer credits toward closing costs, so ask your agent to negotiate these for you.
Step 6: Closing the Deal
The closing process typically takes 30–45 days. During this time, you’ll:
- Finalize your mortgage paperwork
- Complete inspections and appraisals
- Sign your closing documents
It can feel like a lot, but once you’re done, you’ll officially get the keys to your new home.
Tips for First-Time Homebuyers in Las Vegas
- Don’t Skip the Inspection: Even if the home looks perfect, inspections can reveal costly issues.
- Know Your Budget Beyond the Mortgage: Property taxes, HOA fees, and utilities all add up, so plan ahead.
- Think Long-Term: Buy a home you can grow into, not just one that works for right now.
- Stay Flexible: The right home might not check every single box, but it should meet your most important needs.
- Leverage First-Time Buyer Programs: Nevada offers down payment assistance and other incentives, so take advantage if you qualify.
Final Thoughts
Buying your first home in Las Vegas is an exciting step, and with the right preparation, it doesn’t have to feel overwhelming. The city has a strong economy, a wide range of neighborhoods, and flexible financing options—so there’s truly something for every type of buyer.
The key is preparation: understanding your finances, working with trusted professionals, and knowing what to expect in the market.
If you’re ready to take the next step, connect with The Derek Parent Team. We’ll guide you through the process, answer your questions, and help you secure the right loan for your first home in Las Vegas.
Debt vs. Income: What You Need to Know
Income is a crucial component lenders consider when granting you a mortgage. However, income is not all that a lender will consider when determining how much you qualify for. They will also look at your debt to income ratio, in addition to other financial indicators.
If you make a lot of money but also have a lot of debt, this could be a red flag to lenders and reduce your borrowing capacity.
How debt & income affect your mortgage
Income and debt are yin and yang, opposites of each other. Debt is a liability, whereas the more income you have, the more power you have to make those liabilities go away. Having more income also gives more control of the following.
- It allows you to prepay your mortgage faster.
- It allows you to qualify for more when buying a home.
- It allows you to move into a shorter and more aggressive debt pay-down structure such as a 15-year fixed-rate mortgage.
- It allows you to pay off your credit cards in full every month, rather than paying unnecessary and pricey interest (assuming you’re making smart financial choices).
- It allows you to consume smart debt, such as purchasing a rental property that can generate even more income.
- It allows you to make investments, generating more income.
- It allows you to save and plan for the future.
Having this control over these and other financial choices is precisely why it is CRUCIAL to carry a debt-to-income ratio no bigger than 36% of your gross monthly income. The goal when borrowing mortgage money is to put yourself in a position where you can have a life beyond paying it off, while still saving and contributing to your retirement savings.
What you need to consider before you buy
Always remember it takes $2 of income to offset every $1 of debt for a 2:1 ratio for mortgage qualifying purposes.
If you want that fancy Mercedes at an $800 per month car payment, then you’ll need $19,200 a year in extra income or you’ll need to cut a current debt payment of $800 to balance your debt-to-income ratio.
If you want the dream house at $3,500 month, then aim your debt-to-income ratio at 36%—meaning you would ideally want income at $117,000 a year without carrying other consumer obligations in order to afford this mortgage.
When you are thinking about buying a home, also remember to consider what the future holds for your finances. For example, if your monthly expenses will likely increase in the future due to expenses like childcare costs or college tuition, this is something important to keep in mind. By keeping your debt to income ratio below 36% of your gross monthly income, you’ll put yourself in a position to enjoy your new home but also be able to continue saving for your future.
Unexpected Homebuying Roadblocks
Your offer has been accepted on your dream home and you have a down payment, good credit, and little debt. So the escrow process should be a breeze, right? WRONG! There are some surprising deal breakers that can quickly cause the transaction to go south. Here are a few of the most common ones.
Closing Lines of Credit
Maybe you’ve realized you have a few more credit cards than you’d like your lender to see. Time to shut ’em down before they check your credit, right? Not so fast. Closing down multiple accounts could actually ding your credit. Credit is composed of a few key components, the age of an opened account being one biggie. Shutting down multiple accounts will also lower your credit utilization rates, which can be yet another credit killer. Research the impact of any change to your credit before taking action.
Not Calculating the True Cost of your Mortgage Payment
The cost of homeownership goes far beyond a monthly mortgage check. There are HOA fees, maintenance costs, PMI, etc. Make sure you’ve calculated — and recalculated — whether the cumulative costs will be feasible. You don’t want a nasty surprise when you finally crunch your numbers and realize they don’t fit within your current financial circumstances.
Forgetting Maintenance Costs
Remember that you’ll have to spend much more time and money on the dream house with a pool in the backyard. If you simply don’t have the budget for a home with a pool, communicate this to your agent before you start looking at houses. The last thing you want is to end up falling in love with a home you simply can’t afford to maintain.
Assuming Fixtures are Part of the Deal
Make sure you and the seller agree on exactly what will be included — and what the seller will be taking to their new home sweet home. Things such as light fixtures are often assumed to be a part of the package, but if it’s an heirloom chandelier from the seller’s grandma, chances are they’ll consider it fair game to take when they go. Set out clear expectations of what’s staying and what’s going to avoid any confusion or upset.
Buying a home can be stressful, but with a little preparation (and the right lender and real estate agent) things can go relatively smoothly. No matter what happens, remember to stay flexible. Some things may arise that are out of your control. How you respond can ultimately sway the outcome — and hopefully get you the house of your dreams!
What Happens if You Inherit a Mortgage?
Most homeowners have mortgages, and the sad reality is all homeowners die eventually. And, if a homeowner dies with an outstanding mortgage loan, the mortgage company still expects to be paid. Whether the balance owed will be due all at once or can be paid off over time depends on who inherits the home and the state where thedeceased’s estate is being administered.
Who will owe?
If someone dies owing money on a conventional mortgage, the mortgage company must usually be formally notified of the death as part of the probate process. However, if the deceasedtransferred his or her home to a living trust, such notice may be optional. (Sometimes the loan documents require it.)
If the home is owned by spouses and one of them dies, the mortgage company may allow the surviving spouse to make payments without interference since the loan had been extended to both parties.
If, however, the property is inherited by someone else, such as the deceased’s children, or if the home was just in the name of the deceased, the mortgage company may require the new owner to refinance the mortgage or pay the entire loan balance owed within a fairly short period of time. If the new owner is unable to meet its demand, the lender can foreclose on the home. (If the home was ultimately lost to foreclosure, that should not affect the credit of the “heir” because the heir was never personally obligated to pay the mortgage.) Flexibility on the part of the mortgage company in these circumstances is difficult to predict.
What should I do if I can’t pay?
Sometimes, people do not notify the mortgage company of a mortgage holder’s death and simply continue paying the loan. This scenario might happen, for example, if the heir to the home has bad credit, cannot afford to refinance or, alternately, pay the entire balance due, and yet wants to hold on to the house.
This strategy, however, could blow-up in the heir’s face should the mortgage company discover the ruse because the mortgage documents themselves will allow a foreclosure if the company is not notified of the death within a specific period of time.
All 50 states have laws that regulate mortgages at death. The very best option is to consult with an experienced estate attorney in the state where the home is located. That way, you can learn what specific options you may have.
This article was written by Brad Wiewel and originally published on Credit.com.
What's the Difference Between Getting Pre-approved & Pre-qualified?
Many people mistakenly believe that getting pre-approved for a mortgage is the same thing as getting pre-qualified. They are NOT the same! Here's the difference:
Getting Pre-qualified
Most sellers will require your pre-qualification letter before they’ll even consider your offer. Ask your lender for a prequalification letter. These are relatively simple to get and they just give a rough, unverified estimate of the loan size you may qualify to receive. Most lenders will give you a pre-qualification based on your verbal self-reporting of your income, assets, debts, and down payment size.
Estimated time: 2–3 days
Getting Pre-approved
The pre-approval stage is when lenders verify everything you’ve told them. You’ll need to supply proof of income, proof of assets, proof of employment, records of any debts you hold, and of course identification documents (such as your Social Security card) and a credit report (which the lender will run).
Once you’re pre-approved, you’ll receive a letter stating the exact amount of loan for which you’re approved.
Estimated time: 1 week to several months.
3 Things to Know about FHA Loans
FHA loans are popular with mortgage borrowers because of lower down payment requirements and less stringent lending standards.
Simply stated, an FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
Less-than-perfect credit is OK
Minimum credit scores for FHA loans depend on the type of loan the borrower needs. People with credit scores under 500 generally are ineligible for FHA loans. The FHA will make allowances under certain circumstances for applicants who have what it calls "nontraditional credit history or insufficient credit" if they meet requirements. Ask your FHA lender or an FHA loan specialist if you qualify.
Lender must be FHA-approved
Because the FHA is not a lender, but rather an insurer, borrowers need to get their loan through an FHA-approved lender (as opposed to directly from the FHA). Not all FHA-approved lenders offer the same interest rate and costs -- even on the same FHA loan.
Costs, services and underwriting standards will vary among lenders or mortgage brokers, so it's important for borrowers to shop around.
Closing costs may be covered
The FHA allows home sellers, builders and lenders to pay some of the borrower's closing costs, such as an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an inducement for the borrower to buy a new home.
Borrowers can compare loan estimates from competing lenders to figure out which option makes the most sense.
Divorce? The 5 Worst Money Mistakes
Written by Guest blogger: Leslie Thompson
During a divorce, a spouse who hasn’t been involved in the family’s finances can often be at a disadvantage during settlement negotiations. That’s why it’s so important for both spouses in the process of dissolving their marriage to understand their post-divorce financial needs and their current financial situation.
The following five items are often overlooked as part of the settlement process, but they’re vital areas to address:
- Cash flow needs
Understanding your need for immediate cash flow is extremely important in determining which assets would be the most beneficial for you to receive in the divorce. If immediate cash flow is a concern, the most valuable assets for you are ones you could sell easily and quickly (so-called liquid accounts), such as stocks, bonds, mutual funds and possibly Roth retirement accounts.
If immediate cash flow is not an issue, a combination of assets with various degrees of liquidity (taxable and retirement plan accounts) will likely be more beneficial long-term.
- Joint liabilities
Just because you agree to split a liability does not mean that the lender will honor your property-settlement agreement. Mortgages will need to be refinanced (if possible), any outstanding tax liabilities on jointly-filed returns will need to be paid and jointly-held credit cards will need to be canceled.
It is important that all liabilities are settled before completing a divorce, either by paying them off or by transferring them to the spouse taking responsibility for the debt.
It is also a good idea to run a credit report to determine if there are any outstanding debts that need to be addressed before settlement.
By securing proof that all liabilities have been settled before the divorce finalization, you’ll avoid an unpleasant surprise when a creditor demands payment from you for a liability that you thought had been settled.
- Taxes on assets
It’s critical to review the tax impact of your investments when evaluating the division of your assets. While two assets or investment accounts may have equal dollar values, their economic value could be vastly different when taxes are factored in.
For example, Roth IRA and Roth 401(k) accounts are funded with after-tax dollars; their future growth and distributions are tax-free. On the other hand, traditional 401(k)s and deductible IRAs are funded with pretax dollars and when you withdraw money from them, taxes will be due on both the amount you contributed and the growth of the investments. As such, Roths have a higher economic value than non-Roth 401(k) or deductible IRAs because they won’t be reduced by future taxes.
If you are younger than 59 and a half, you will pay income tax on withdrawals from non-Roth retirement accounts and possibly a 10% tax penalty. But you can avoid the 10% penalty if the distribution occurs within 12 months following a divorce.
You’ll also want to think about any unrealized capital gains on your taxable investments, since taxes will be due someday. Keep in mind that the first $250,000 of gain from the sale of a principal residence is sheltered from tax.
- Past tax returns
It’s a good idea to review the past three to five years of the tax returns you filed as a married couple. Aside from showing you how much income you two had in a given year, you’ll see whether there are any assets on the settlement agreement or if there are what are known as “tax assets” that need to be considered in the negotiation — such as capital loss carry-forwards, charitable contribution carry-forwards or net-operating losses.
“Tax assets” provide the user a reduction in future taxes and should be considered an asset when splitting the marital estate. But left unresolved, they can cause confusion or errors when filing future tax returns.
- Division of retirement assets
Retirement assets typically represent a large portion of a couple’s net worth and there are special rules to allow for the transfer to be tax-free. You’ll want to make sure the intricacies of these transfers are handled with care.
The divorce decree should specify that any IRA is to be treated as a “transfer incident to divorce” to avoid having the transfer classified as a taxable distribution. Be sure to determine if any basis exists from after-tax contributions made to the IRA — an amount that will be tax-free when distributed. (Consult a tax adviser on this.)
Employer-sponsored retirement plans transfer through a qualified domestic relations order, which requires specific information and approval by the court and plan administrator to allow for a tax-free qualified transfer.
Leslie Thompson is Managing Principal of Spectrum Management Group in Indianapolis. With over 20 years of financial industry experience, she has holds the Chartered Financial Analyst, Certified Divorce Financial Analyst and Certified Public Accountant designations.
*This blog is for information purposes only. Derek Parent and NFM, Inc. accept no liability for its content. Please consult a tax adviser or legal counsel for more information.*