When one partner wants to buy out the other’s share in a dissolution, or when legal costs need to be funded, financing arrangements become essential. Understanding the mortgage and financing options available in dissolution situations enables better strategic planning.
The Buyout Scenario and Financing Needs
The most common financing need in dissolution arises when one partner wants to retain the property by purchasing the other’s share. Unless the buying partner has sufficient liquid assets, they will need financing to fund this buyout.
The amount to be financed is typically the other partner’s share of the property’s equity value – the market value minus any existing mortgage or debt.
Mortgage Financing for Buyouts
A partner who wants to buy out their co-owner can typically apply for a mortgage on the property, using their ownership (once the buyout is complete) as collateral. Israeli banks provide mortgages for this purpose, though the terms depend on the borrower’s financial position and the property’s value.
The mortgage application should ideally be arranged in advance so that financing is secured before the dissolution agreement is finalized.
The Existing Mortgage Complication
If the property already has a joint mortgage, the buying partner must either pay off the existing mortgage, refinance it in their sole name, or convince the lender to release the other partner from the joint obligation. Banks are not always willing to release a co-borrower, making refinancing the most reliable approach.
Legal Costs and Their Financing
Beyond the buyout price, partners must consider the legal costs of dissolution proceedings. Court fees, attorney fees, appraiser costs, and tax payments can be substantial. Understanding these costs in advance allows for appropriate planning.
Tax Planning Integration
Financing decisions should be integrated with tax planning. The structure of the financing can affect the tax treatment of the transaction. An attorney working alongside a mortgage broker and tax advisor can help structure a financing arrangement that is both feasible and tax-efficient.
