One of the toughest, most emotional decisions of divorce is whether to keep or sell the family home. You have so many memories of starting a life together with your partner, bringing home a child, having a family pet, celebrating family holidays together, but, when the relationship ends, so do the dreams you once had for your future in the home together.
Finding the strength to persevere through the heartache, and making a huge financial decision, can feel like the most overwhelming task you’ve ever faced. Be sure you know what your options are so you can make an informed and well-planned decision that won’t end up costing you more money, taxes or heartache. Often, the decision to keep the house is made based on emotions; however, it should be weighed out alongside other assets in the property settlement agreement for the long-term.
Start by thinking long-term: do some reflecting on the next five, ten or fifteen-years down the road. Do you see yourself still in that house? Do you need to stay in that particular neighborhood? Will you need to be in that school district?
Weigh the pros and cons of staying and moving very carefully. Real estate is a big investment and should be given its proper attention. If you end up refinancing the home in your name, you could be asked to provide the lender a financial statement, proof of income (possibly for the last two years), and other income sources, like support from your ex-spouse. This might not be enough to qualify for the type of mortgage, or the interest rate, you two shared together.
I get asked the question a lot: “Should I keep the mortgage or should I rent?” The answer is always: that depends on your financial situation. Consider all the costs of home-ownership. It takes a lot of work, and money, to run a household – there are bills that add up: water, waste removal, utilities, repairs and upkeep, not to mention the actual mortgage and property taxes. What if a major appliance breaks down, a pipe bursts, or the roof leaks – do you have enough money saved in reserves to fix it? The upkeep on a home can be more than you want to take on alone – think about all the yard work of mowing, trimming, and weeding landscaping. Where I live, I had to also take care of the snow removal at 6am so I could get my car out to go to work after a blizzard. It was not fun! Renting may make more sense for the short-term if you’re not ready for the commitment of a solo mortgage.
Depending on the value of the home at the time of sale, you could be assessed capital gains taxes. If not properly planned for, this could result in a tax payment you are not ready to make. Married tax filers are allowed a $500,000 exemption on a property once every two years. If you keep the home, then later decide to sell it yourself, as a single tax filer, you can only claim a $250,000 exemption. If the home gained more than $250,000 since you two bought it, you would be on the hook for the excess capital gains. Thus, it might make sense to sell the house before the divorce is final.
The biggest issue is that in a settlement agreement, if you decide to keep the house (and potentially the equity you built up together) you may forfeit another asset, such as a portion of a 401k. Consider the trade-off: a home might appreciate 2-3%, depending on where you live. A properly managed portfolio could potentially earn 6-8% per year, compounding annually, if left untapped. That is much better resource for future wealth than holding onto a piece of property that does not contribute to your long-term retirement goals.
There are many factors to consider when determining the sale of a home in a divorce. Make sure you know what the pros and cons are of all of your options. Consult a divorce financial professional to explain these factors so you can be sure you are making the best decision for you, your family, and your future.
~ By: Wendy Althen, CDFA®
Financial Advisor | Baird
Certified Divorce Coach, Lawyer, Yoga Teacher, Divorced Parent