Stay? Go? Sell? Keep? Make Careful Decisions about the House in Divorce

June/July 2014 issue of the Rhode Island Women’s Journal
Stay? Go? Sell? Keep?  Make Careful Decisions about the House in Divorce

It may come as no surprise that the marital house is usually one of the most difficult subjects in divorce discussions between spouses, not only because the home property could be the most valuable asset in the marriage, but also due to the emotional ties and history associated with the family home.

In many divorces, it is often the custodial parent (and usually the wife/mother) that wants and chooses to retain the house.  This is usually to keep a semblance of stability in her and her children’s lives, stay within the same school system, etc., but there are also cases where the memories of happier times associated with the house are desired by the mother.   This decision carries a myriad of choices and financial burdens that should be reviewed and carefully considered before the divorce is finalized.  Ignoring risks such as cash-flows, affordability and tax issues could carry heavy consequences later on.

In our work with divorcing mothers, we often look at the affordability issue of keeping the house.  Divorce means establishing two households where there was once just one, and we frequently see that dividing incomes and assets means a compromise to previous lifestyles for one or both spouses and the custodial family.  There could be two mortgage payments, two sets of utility bills, property tax payments, insurance, maintenance, etc.   If there are children of the marriage, required child support payments (to the lesser-earning parent or the custodial parent) may help supplement earned income by the custodial mother, but is often not nearly enough.  If spousal support (alimony) is also included in the settlement, a significant cash-flow shortage may result once that support ends.  Such a shortage may force her to tap savings and retirement accounts to make ends meet; not a desired course of action and one that could create extra taxes and jeopardize her financial future.

Another common pitfall can occur when a home is sold post-divorce   Many ex-spouses who keep the house are surprised to be told they owe a capital gains tax on the sale of their home, if they have more than $250,000 in equity (profit over cost basis) at sale.  Most think it is $500,000, but in fact, the shelter is actually $250,000 per joint owner.  So if a husband turns over ownership to his ex-wife, via a quit-claim deed on the house, and she thereafter owns the house solely, she loses his $250,000 capital gains tax shelter.

Further tax issues arise if the marriage and home ownership occurred prior to 1997.  In that year, determining the cost basis of a home was greatly simplified, but before 1997 and especially if there were several homes in the marriage where the cost basis transferred from house to house, calculating the current basis could be complicated.

In marriages where there is a significant income disparity between the higher-earning ex-owner spouse and the lower-income spouse remaining in the home, complications could also arise when considering the mortgage.  Even if the spouse who is leaving and gives up ownership does all that is necessary to relinquish ownership rights, their name and responsibility may still be on the mortgage loan.  If the remaining spouse fails to make the mortgage payments, the potential default affects the ex-spouse’s credit rating and financials as well.

Another issue with keeping the house is whether doing so allows for an equitable division of assets in the divorce.  Home equity may not always be a liquid asset and appreciation of the house property’s value may be significantly different than other assets on the table.   This could affect the ability to build retirement wealth for the future and other financial goals.

The solution to these many problems is to have a financial professional, (preferably a Certified Divorce Financial Analyst), review the various inputs and factors affecting future home ownership.  CDFA’s are able to provide spreadsheets, graphs and other reports that detail whether keeping the house, downsizing, or selling the marital home altogether is the right course of action in order to maintain financial stability and meet other short and long-term goals.  The analysis may point to a solution that is not what you wished for, but better to know ahead of time, rather than face dire financial consequences later on.

Read other articles we have published in the Rhode Island Women’s Journal, or contact us  via our Contact Us page to receive other free articles and information about divorce finance and planning.