05/17/2023
Four Things To Consider When Deciding “Should I Keep The House In Divorce?”
The marital home is often a couple’s largest asset and can also be their largest debt. It is where families are started, children are raised, and memories are shared. There are typically strong feelings about the marital home post-divorce given it is commonly the asset with the most emotional ties for the family.
Besides all the emotions and memories wrapped up in the property, there are several financial and social implications to consider when deciding whether it is in your best interest to keep your marital home after divorce.
Affordability
Likely the most important consideration when weighing your housing options post-divorce is the affordability of the property. A home once affordable for a married couple might not be sustainable on a single income.
Consider if your income, any spousal support you receive (or are obligated to pay), any child support you receive (or are obligated to pay), and your liquid assets are enough to balance with all the home expenses that could come into the picture. It is important to be realistic about the costs of upkeeping a home.
You should not only consider the fixed expenses like the mortgage payments, property taxes, and utilities, but keep in mind the maintenance and general house upkeep as well. Maintenance costs can fluctuate but a safe buffer to budget for would be roughly 2% of the home’s value every year.
It is also important to think about whether selling the home will help you achieve your financial and retirement goals. Keeping the house in lieu of more liquid assets—that may appreciate at a faster rate than the home and provide you with more liquidity and cash flow—could force you to make meaningful adjustments to your spending and savings goals in the future.
If you decide to take over the home mortgage, you will likely need to refinance it to remove your ex’s name. Refinancing can be costly, and you risk the new interest rate being higher than your current rate. Additionally, spousal support and/or child support payments must typically be received for at least six months post-divorce to qualify for a refinance.
If spousal support and/or child support is not expected to be a part of your settlement, and you instead plan to use investment assets to fund your mortgage payments, qualifying for a loan can be more difficult. You should begin these discussions with a mortgage broker well before your divorce is finalized to map out a game plan and ensure you can qualify for a loan.
Tax Impact
A piece that can often be overlooked is the tax implications of selling your home. If your home has greatly appreciated over the years, you are eligible to exclude a capital gain of $250,000 if filing single, or $500,000 if married filing jointly. For example, if you become the sole owner of the property and then sell your home, you will owe tax on any gain from the sale exceeding $250,000.
To break it down a bit, let’s assume you purchased your home for $500,000 and now you can sell it for $800,000 as a single filer. In this case, there would be a $50,000 taxable gain ($800,000 - $500,000 = $300,000 gain - $250,000 gain exclusion). Depending on your income, that could cost you $7,500 to $10,000 in capital gains tax.
On the other hand, continuing with the example above, if you sell the home while you and your ex are still joint owners, the combined exclusion of $500,000 would erase your tax bill altogether.
To receive this exclusion, the following criteria must be met.
You must have owned the home two out of the last five years prior to the sale date.
You must have used the property as your principal residence at least two of the last five years prior to the sale date.
It is important to note that only one spouse needs to use the home as their principal residence ( #2 above), but both spouses need to remain owners ( #1 above) to each qualify for a $250,000 exclusion ($500,000 in total). Because of this, it is common to see both spouses remain on the title of the home post-divorce to qualify for the double exclusion. Of course, this can complicate things and will not be a good solution in every case. However, it is a strategy to consider if you plan on moving or selling in the near term and there is a significant gain involved.
The mortgage interest tax deduction is another homeowner tax benefit. In situations where you utilize the itemized deduction, mortgage interest and real estate taxes paid for that year are deductible against your taxable income. The spouse who pays the mortgage and real estate taxes is the only one who can deduct the tax interest on their return, and this person does not have to live in the home.
Emotional and Social Impact
In addition to the financial decisions, it’s important to consider the emotional aspects of this decision, which are often more difficult with children involved. In some situations, moving provides a fresh start, and a new space of your children’s own can be exciting for them.
However, moving is stressful and can add additional strain on you and your kids during an already tumultuous time. It’s important to consider the benefits of remaining in the same school district (especially if your children are excelling in their studies), and the close ties and sense of community you and your kids have with the neighborhood and neighbors. Staying in the home may provide stability and familiarity to your kids, which can help them adjust better to divorce.
While many divorcing individuals plan to sell the family home as soon as the kids go to college, it is smart to consider selling it sooner if it is not affordable, or waiting longer if it is. College is a very transitional time, and it is helpful to have a familiar home to come home to during the holidays, and the summer after freshman year. College kids often want to see their high school friends on breaks and if neither parent still lives in the school district, the child may choose to sleep at friends’ houses rather than at either parent’s.
If it is not affordable to keep the family home or neither spouse wants it, sometimes it makes sense to move before the kids graduate high school so they can adjust to new rooms in a new home before leaving for college. Selling the family home before college costs accumulate also helps families understand what is affordable for college.
There has also been an increase in divorcing women and men choosing to rent rather than immediately buy a new home, given the increased rental options and owning a home no longer being perceived as “The American Dream” after the financial crisis. This is another option that should be considered, especially if the current location of the marital home is not where you envision yourself living for the long term.
Take A Step Back – The Big Picture
Besides the financial, emotional, and social implications of the marital home, consider what your ex’s priorities are as well. Could this be a bargaining chip you could use to your benefit in negotiations? Reflect on why your ex may or may not want the home. So much of divorce is about give and take and weighing each party’s wants and needs. If you are open to giving up the house, could you instead negotiate more liquid assets to fund a fun family vacation? What other opportunities could come from freeing your ties from the home? Be open minded! To negotiate the best settlement for your next chapter, it is key to look at the situation from all angles.
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