A frequent question I get from my clients is “Can I keep the house?” A better question might be “Should I keep the house?”
When you are going through divorce, it can feel as if everything you thought you knew about your life and your future is suddenly turned upside down. It can be a challenge to determine what steps to take and what you best options are. It is common for people to want to stay in the house to maintain some semblance of normalcy. However, be aware that staying in the family home may not be the best choice for your situation.
Some things to consider:
Can you qualify for a mortgage in your own name?
If so, is your monthly payment going to be affordable? Will it still be affordable when child support and or spousal maintenance end?
How much does it cost to operate the house?
Have you taken into consideration extraordinary expenses? For older homes, I always recommend a home inspection so that any lurking big ticket items can be identified, planned for and negotiated prior to a property settlement.
What about potential capital gains down the road when you sell the house?
As a married couple your marital exclusion is up to $500,000, but as a single individual your exclusion is only $250,000. If the sale price less your original basis less your selling costs exceeds $250,000, then you will have a capital gains tax liability. Your original basis is what you paid when you bought the house and not what it was refinanced for or valued at in a divorce. If you purchased that home 20+ years ago, your basis could be very low versus the fair market value of real estate today.
Will you have enough income from your divorce settlement to live on?
Remember that a house is a place to live and does not provide any income to support your lifestyle. If you and your spouse lived there for a long period of time, it’s likely there is a large amount of equity in your home. If you are awarded the home in the divorce, it could be the largest asset in the settlement. Say your home has a market value of $400,000 and there is $300,000 in equity. As marital property, if half of that equity is yours, then the other half will be your spouse’s. If you keep that home, then a full $300,000 of your settlement will be tied up in that property. That same money could generate over $13,000 a year in income if it were invested conservatively.
Divorce can be difficult, but it also is an opportunity for a fresh start.
To make an educated decision regarding your marital home and other issues related to your divorce, we recommend that you speak with trusted advisors, which could include a divorce attorney or mediator, a Certified Divorce Financial Analyst, a realtor, and a mortgage broker.
Andrea McGrath is a Certified Financial Planner (CFP®) and Certified Divorce Financial Analyst (CDFA®) with Divorce Strategic Planning. Andrea helps divorcing individuals achieve financial independence and sustainability before, during and after divorce. Through thorough financial analysis, Andrea helps her clients understand things such as marital assets, property division, retirement and pension plans, spousal and child support, home ownership, tax problems and creative settlement solutions as well as post- divorce support. Her goal is to make sure her clients receive a fair and equitable settlement that can go the distance. You can find Andrea online at StrategicDivorcePlanning.com.