Should you keep the marital home after your divorce?
Working with clients that are splitting up, this question is one of the top one's I encounter.
The family home brings with it lots of emotions and it's understandable why one would want to keep the marital home. Sometimes there are small children living in the home and moving seems disruptive. Sometimes it just comes down to too many changes too soon.
In divorce planning, like financial planning, one must consider the money component as well as the emotional. There is no getting around it. Divorce will be one of the most emotional and trying times you will encounter in your life.
However, holding on to the marital home when one cannot afford to do so will lead to disaster. That is why it is imperative to ascertain if one can truly afford to stay in the home. If you are foreclosed on, ruin your credit, or can't keep up the maintenance of the home, you are just prolonging the inevitable.
If you find out you cannot afford the house, it doesn't mean you have to sell immediately. If for example, you have a junior in high school, and you and your ex decide to let him finish out school is best, then you might agree to sell the house after his graduation. You could then sell the house and share in the proceeds.
You will need to work out a lot of details if you decide to keep the house for a period of time. Who pays for major repairs? Who pays the real estate taxes? Who deducts the interest payments on the mortgage?
What About Taxes?
Another question I get a lot is, "If we sell the house after getting divorced, do we have to pay taxes on any gains?"
You may be aware that if one lives in their primary residence for two of the last five years, and have a capital gain on the sale of this property, they can exclude from taxes up to $500,000 if married and filing jointly. (If you are single, you can exclude up to a $250,000 gain). However, what if one owns the home with their ex and have been divorced for three years? How does that work, tax wise?
It must be done correctly but if the separation agreement contains certain language, a divorcing couple can still take advantage of the $500,000 capital gains tax exclusion as long as it doesn't exceed a certain number of years after the of the date of divorce.
Another option if one feels they cannot sell the home is to buy out the other spouse. Again, one must look carefully to see how this would work, the costs involved, and whether one could afford to maintain the home. One could also just keep things as is and hold the house jointly. This may make sense if you are only keeping the house for a few years, however, there are pitfalls to this as well.
There are many twists and turns surrounding the marital home. Before making ANY decisions, it is best to sit down with a professional and walk through all of your options.
This blog article is very basic in nature and should not be misconstrued as tax or legal advice.
Questions? Please feel free to reach out to me.