One of the biggest challenges a divorcing couple faces is the equitable distribution of their property. In other words, answering the question, “Who gets what?” in a manner that is fair to both parties.
If you’re relatively young and don’t own a lot of marital property, this might be a pretty simple divorce process. If you’re on good terms and there are no minor children involved, you might be able to separate property and make a clean break.
However, if you own a home together, it can be a little more complicated. After all, your primary residence is often your biggest asset.
1. Can either of you afford to keep the family home after the divorce?
One of the benefits to getting married is being able to consolidate living expenses. This includes only having to pay for one home.
When getting divorced, the exact opposite happens. Someone moves out, and living expenses go up for both spouses.
For example, let’s assume that after a divorce, everyone’s income stays the same. In this case, the same income must support two housing payments. Even if one of those payments is for a cheap apartment, you’re still paying more for housing than before.
If you had purchased a home that was reasonably within your income range, this might not be problematic. But many couples buy the biggest house they can afford.
Let’s imagine such a couple. The mortgage and other expenses stretched their budget before the divorce. How do you think this will play out afterwards?
It really depends on who wants to maintain ownership of the house. Because after the divorce, only one of you gets exclusive use of the house.
If you’re the primary breadwinner, you’ll probably be expected to make alimony and/or child support payments.
Could you do this and expect to keep the house? Maybe. Or maybe not.
But if you’re the custodial parent who expects to receive alimony or child support payments, you have to consider this as well.
Do you have to get a new mortgage or can you keep the existing mortgage? Can you qualify for a new mortgage?
What would happen to you if your ex-spouse lost their job? What if they asked to modify their alimony payments down the road because of unforeseen economic circumstances?
Or simply stopped making payments? How long would your finances last before you fell behind on the bills?
2. Is it too much house for either of you?
Let’s imagine that as a married couple, you bought the biggest house you could afford. You might have to wonder whether it’s too big for the person who keeps it.
After all, it’s not just the mortgage payments. You have to consider costs such as:
- Maintenance & repairs
- Utility bills
- Property taxes
- Replacing appliances
All of these costs can add up.
Furthermore, if you’re the one keeping the house, you might be giving up something else as part of the property division.
Like the cash or investments you might need to keep up with the payments. And if you don’t have enough liquidity to pay your bills, you might end up house-rich, cash-poor.
And if you don’t have enough income or spousal support, you might not get through those tough times that every homeowner faces.
3. Could you weather a turn in the housing market?
What would happen to your financial situation if your home’s value dropped by 20%? Before the divorce, perhaps your finances could have weathered the storm until the fair market value of your home recovered.
A lot of people experienced this in 2008 with little impact because they didn’t have to sell. After all, a down real estate market doesn’t affect people who aren’t in the market.
But what if you eventually decided that you couldn’t afford to keep the house. Despite your best efforts to manage your finances, you have to sell in order to live off the proceeds of the sale?
And what if you came to this realization just to find out that the value of your property had dropped 10-20%?
Or, what if you needed to tap into a home equity line of credit just to find out that there’s no more home equity?
Before you decide that you’re going to keep this house, you might want to consider whether you can financially weather a downturn in real estate market conditions. If you don’t know whether you can afford to keep the house for at least 5 years after the divorce settlement, you might want to consider selling it and dividing the home sale proceeds.
But before you decide to sell your house, you should know whether it’s in a condition where you can sell it in the first place.
4. What shape is your house in?
Do you have a lot of deferred maintenance? Does your house need to be ‘updated?’ The truth is, almost no homeowner really knows the condition of their house until they’re getting ready to sell it. And divorce proceedings might not be the best time to find out how much you’ll have to discount the list price because of its condition.
Even if you plan to move forward, you won’t have a true idea of what you’re in for until you talk to a reputable real estate agent. A couple of things you’ll want to keep in mind:
Friends and family probably won’t help much here.
If you ask your friends or family, you’ll probably not get the straight story. Either they’re used to your home’s condition, or they don’t want to hurt your feelings.
If you’ve lived in the home for a while, you might risk stirring up reactions like, “Why didn’t you tell me this before,” and other arguments.
All this on top of the emotional stress that a divorce brings.
A real estate agent will help. But the good ones won’t give you too much free advice.
With real estate agents, a funny thing happens. When you ask a real estate agent for the truth, they’ll tell you two things.
They’ll tell you:
- What the house is currently worth in today’s market conditions
- How much money it would take to get it into prime condition.
Both are equally important.
Deferred maintenance only gets worse over time. If you know that the roof needs to be replaced and that the appliances are on their way out, that doesn’t change. It only gets worse.
If repair and upgrades seem expensive now, they will be a lot more expensive later. Especially if your ex-spouse was the one that did all the maintenance.
Even if one of you intends to keep the house, it’s still a good idea to have a real estate professional help you put the numbers in place. For example, you can ask for a comparative market analysis (CMA).
A CMA is an estimate of your home’s sale value based on recent sales in your area. Most real estate agents can generate a CMA within a day or two. Knowing the numbers will help you keep things in perspective when dividing all of your marital assets.
Which brings us to our next question.
5. What else are you divvying up?
In many families, the home is the primary asset. If you sell the home, it’s pretty easy to figure out how to divide the proceeds from the sale of a home. But there might be other valuable assets at stake here.
What if one of you wants to keep the house? In that case, the spouse who keeps the home might be asked to forego some other marital assets. This might include investments, cash, retirement accounts, vehicles, or ownership in a family business.
Depending on what other shared property you have, it might be difficult to figure out each person should walk away with. In that case, having a recent appraisal or your real estate agent’s CMA will help you determine what’s fair.
6. What are the tax implications?
Taxes can be tricky. But it might be in your best interest to consider the tax implications before your divorce is final. Here are a couple of things you need to know about the capital gains tax rules on the sale of a house.
Capital gains tax exclusion depends on what your divorce decree says
You might not sell the house immediately after the divorce. But you’ll want your divorce decree to be worded properly so that your property transfer is nontaxable. And to give you flexibility in case you change your mind down the road.
Section 121 of the Internal Revenue Code covers capital gains treatment on the sale of a house. It grants certain flexibility in divorce cases. But that flexibility depends on the wording on your divorce documents.
So make sure your divorce attorney includes the proper language to cover the transfer of your house.
Who takes the deductions on mortgage or state property tax payments?
If one of you remains in the marital home, but the other one is making payments, who gets to take the tax deduction?
It might not matter as much today, as more people are taking standard deductions. But for people who itemize their tax deductions, this could be a big deal
Your best option is to discuss this with a financial advisor.
7. What does your divorce lawyer say?
Perhaps you and your ex have come to a written agreement. Perhaps you feel like you’re making the best choice of your available options. But what if your divorce attorney says otherwise?
Don’t have a divorce or family law attorney? You should talk to one. If you don’t think you can handle a divorce attorney, you should get a free consultation to see if any red flags come up.
If that’s not an option for you, you might consider talking to a mediator. Finally, you should probably hire a financial planner to help you understand the financial implications of your decisions.
Divorce is never easy. When a divorcing couple owns a house, it makes dividing up the assets that much harder.
But before you try to figure out WHO keeps the house in a divorce agreement, it might be worth discussing whether keeping the house is a viable option.