The family house is where you create and store memories. Families gather there for holidays, babies come home from the hospital, children and pets rampage through the backyard and the people who matter the most to us call it home. But when a couple chooses to divorce, you and your spouse must determine what to do with the house, weighing the pros and cons as objectively as possible so that you make the best financial decisions for the family.
Here are key financial issues to consider when deciding what to do with the house:
ONE PARTNER KEEPS THE HOUSE
Keep in mind that any mortgage on the home will need to be refinanced in the name of the spouse keeping the house, and that spouse may need to buy out the other based on the equity in the home. Like everything else in a divorce, the amount of the buyout is negotiable. Be sure to consider the potential appreciation of the home and any taxes or fees that may result from a future sale.
Before agreeing on a buyout, an appraisal is needed. We recommend at least two appraisals; If they are significantly different, a third may be necessary to come to an agreement on a value that is somewhere in the middle.
If choosing to keep the house, consider whether you can afford it. Can you buy out your ex? After the divorce, will you have enough other assets and income to live on and maintain the home? Consider all the costs of owning your home, not just your mortgage, property tax and insurance payments.
Depending on your divorce agreement, one partner may get the house and the other partner a greater share of other assets. Don’t forget: Cash is king. You can’t pay for groceries with a brick from the house. Remember that, while you may receive alimony or child support, you probably won’t get them forever.
YOU BOTH KEEP THE HOUSE
If you can’t reach an agreement so one person can own the house, both of you could continue owning it as a joint asset after divorce. However, consider whether you want to stay attached to each other financially and whether you’re certain you can depend on your ex-spouse-to-be to keep up his or her end of the financial bargain — house payments, maintenance, expenses and taxes.
YOU SELL THE HOUSE
Beyond the emotional considerations — leaving behind memories, moving on and creating new memories somewhere else — there are important financial considerations for navigating the sale of your house. If the house has appreciated significantly, there may be capital gains owed on the sale. “For example, for a married couple in California, the taxable amount will be capital gains that exceed $500,000, and those taxes will probably be shared between the divorcing spouses.”
The bill will be due when you file for income taxes for the year. The rest of the transaction should be straightforward, and the split of the proceeds can be directed to each spouse’s bank account. Also be aware that sellers generally pay brokers’ commissions for both parties in the transaction.
FOCUS ON THE FUTURE
Figure out your budget for each housing scenario before proceeding. Analyze your post-divorce finances, what you will need to spend day-to-day and what you will need to save for you and your family’s future.
Working through these decisions with a trusted financial professional can help you keep your eyes on your financial success. An advisor will know how to work with your divorce attorney or accountant, if needed, to ensure you have a plan that works for you and your new life.
There is no one right answer, but there can be a wrong answer if you don’t think through the pros and cons. You don’t want to be stuck with a house you feel financially trapped in, hounded by expenses. And if you sell the home, to your ex or another party, you don’t want to walk away without enough money for your future.