We at Divorce Strategies Group know how hard it can be to walk through a divorce. I went through a divorce myself, and it was a difficult process. Many divorcing couples we work with face the difficult decision of what to do with the marital home. It is often one of the most valuable assets a couple owns. We hope to provide some pros and cons to this common divorce dilemma to help you make a decision you can feel good about.
Keeping the House
Financial stability: Selling a home can be expensive, especially if the housing market is down. By keeping the home, you can avoid the costs of selling and buying a new home. Additionally, in the current environment we are finding the marital home is likely tied to a low interest rate which could potentially hurt one of the parties if sold, lost and a new home at more than double the interest rate is purchased. Keeping the mortgage with a low interest rate may enable a lower earning spouse to be able to afford the home or a higher earning spouse the ability to pay child support or for children’s activities to the lower earning spouse who is primarily caring for the children’s day to day needs. You will not typically be forced to refinance the home so you would be able to keep the current rate.
Emotional stability: Moving can been linked to one of the most stressful events we can have in our lives. When you are in the midst of divorce, the last thing you need is to add stress to the situation. Keeping the home, even if for a year, enables you to take a breath and figure out what you want to do longer term.
Emotional attachment: The marital home may hold sentimental value for you. It may be the place where you raised your children or have many happy memories. Keeping the home can provide a sense of stability and comfort during a difficult time for you.
Stability for minor children: Children may feel more secure if they can remain in the same home and neighborhood, especially if they are already dealing with the stress of their parents’ divorce. Allowing your children to keep the same routines, friends and neighbors can provide a sense of stability in this transition for them which may help them maintain their grades at school, stay out of trouble and keep up with their extracurricular activities.
Selling the House
Consider your financial situation: Can you afford to keep the house? Do you have enough money to pay the mortgage, taxes, and maintenance costs? If not, it may be better to sell the house and split the proceeds or sell the house and keep the proceeds while giving your soon-to-be-ex-spouse another asset. The stress of being “house poor” can potentially add so much turmoil to your life, it’s better for you to sell and move. If this is the case, consider renting a home where the maintenance and the taxes are paid by the owner for a certain period of time after your divorce. While renting may seem like throwing money away, sometimes it helps to give yourself a year to settle and regroup after a major life change. Renting for a short period may mean a lower overall cost of living since you are not paying the homeowner taxes or paying for major repairs.
Tax Advantage: When looking at different assets in the marital estate – the house is one of the most tax advantaged assets you have. A home which has been lived in as your primary residence for any two of the last five years is considered your primary residence. When sold, any taxes are taxed as long-term capital gains rate (typically 15%) which is lower than taxes you would pay on distributions from a pre-tax 401k or traditional IRA. The best part is, the first $250,000 of gain is tax free. That is powerful when considering the same dollars lump sum from a pre-tax IRA could have a 25% – 38% or higher tax and penalty burden attached to it. For example, assume you purchased your home for $350,000 and you put in a pool a few years ago for $50,000. That is a $400,000 “cost basis” in the home. Assume you sell the house for $625,000 after selling costs. You have made $225,000 in gains on the house ($625,000 – $400,000). Since $225,000 is less than $250,000, this transaction is completely tax free. So taking this asset in the divorce and selling it after can provide you more net income than taking a pre-tax retirement account and cashing it out for cash flow needs after the divorce.
Consider the emotional impact: Does keeping the marital home mean too much negativity for you? Are there too many bad memories in the home or possibly you know a paramour was in the home and you just want to put that behind you. This can be a strong reason to sell the home.
In conclusion, keeping the marital home can be a challenging decision to make during a divorce process. It is wise to consider your financial situation, consider the emotional impact, and be prepared for the future. We feel it is critical to obtain legal advice prior to signing any documents or agreeing to any terms on your home! A lawyer can help you understand your rights and obligations and negotiate with your spouse’s lawyer.
We can help you understand how financial decisions you make during the divorce will affect your future. We can also help you make wise financial decisions. Schedule a complimentary consultation today if you have financial questions before, during or after your divorce.