Divorce has a way of making you feel as though everything you thought you knew about your life and your future is upside down. It is a surreal feeling. To maintain some sense of normalcy, it is very common to want to stay in the primary home. This I especially true of parents with younger children who wish to keep life the same for their kids. While it is tempting to want to lean on the something familiar like the family home, be aware that it may also be the most costly mistake you can make.
It’s very easy to look at the home from a sentimental view point. However, we encourage you to try to put on a new set of glasses to view your home. Try to think from a purely practical standpoint, as if helping a friend. A house is somewhere to live. And even with today’s sharing economy, unless you are willing to invite strangers into that space, it will not provide any income to support your lifestyle. Furthermore, if you and your spouse lived there for a long period of time, there can be a large chunk of equity trapped in those walls. If you are awarded the home in the divorce, it could be the largest asset in the settlement.
Let’s assume the home has a market value of $400,000 and there is $300,000 in equity. As marital property, half of that equity is yours, but the other half is your spouse’s. So, if you are to 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. And don’t forget about the costs of upkeep and maintenance that will increase the amount of income you’ll need just to make ends meet.
You should also make sure that you are aware of the potential tax impacts down the road. If you were to sell the house while you are still married, the $300,000 capital gain would fall under the marriage exclusion of up to $500,000 and be tax-free. Once you transfer that home into your own name, if you sell it now with a gain of $300,000, the personal exemption is only $250,000 so you will owe capital gains tax on $50,000 of gain or $7,500 and even more if you’re a high wage earner.
Divorce is difficult, but you also have an opportunity for a fresh start and getting off on the right financial footing is essential to your future. To be certain that you understand all the ramifications of any property settlement you are considering, bring a Certified Divorce Financial Analyst® (CDFA®) into your team to shine the light onto some of these issues. You only have one chance to get your settlement right. Take the time to gather information and make sure you are doing the right thing. It will be the best decision you ever made.