A home is typically the toughest asset to divide when it comes to divorce. There are memories, dreams, and a sense of familiarity tied to it, which can influence decision making. Many times, divorcing spouses tend to let their feelings guide their thought process. They consider the emotional stress that could be caused by uprooting their children and their lives by moving to a new place, and conclude that the best choice for their family is to stay put. However, basing the decision to stay in the home on pure emotions can actually cause substantial financial damage and larger amounts of stress.
The decision to keep or sell the marital home should be part of an overall financial plan. Prior to agreeing to a settlement, the following financial aspects need to be evaluated:
Actual Costs of Staying in the Home: While you may be able to afford the monthly mortgage payment, remember to also evaluate the additional costs that come along with the home. These include items such as property taxes, homeowner’s association dues, maintenance, home owner’s insurance, repairs, monthly utility expenses, and lawn and pool services. Do you have funds available to cover these costs? If the total expenses will stretch your budget too thin, it may be best to consider alternative options.
Proceeds from the Sale of Marital Home: Be sure to get a current appraisal of the home and then evaluate what proceeds would be available net of transaction fees and commissions. Could the proceeds be used towards a smaller home or monthly rent payments?
Capital Gains Exclusion: If you’ve lived in your home as a primary residence for 2 of the 5 years prior to selling, you will be able to exclude up to $250,000 of capital gains on the transaction, and will owe taxes on any appreciation above that amount. However, if you choose to sell the home while your ex-spouse is still on the title, you could each utilize the exclusion for a total of $500,000. This is important to keep in mind if your home has appreciated by more than $250,000. Be sure to understand if you can afford the taxes on any excess appreciation.
Lifestyle Change: How will your life be different once the divorce is finalized? Would downsizing or moving to a different location make sense? How will your expenses change and where will your free time be spent?
Refinancing the Home: In order to lower monthly payments, a refinance of the mortgage may be discussed. Ensure that the spouse taking over the payments can qualify for the new loan based on their own income.
Trade-offs: What assets are you giving up in exchange for keeping the home? If you are giving up cash or retirement assets, what plans do you have in place to build your reserves back up? Keep in mind that the home is not a liquid asset and that you are not guaranteed any one price for it in the future. Ensure that you have a well thought out plan in place for funding your retirement and sustaining your day to day needs.
Overall, emotions will always play a part in the decision of whether or not to stay in the marital home. However, it is the financial aspects which must be the focus. By evaluating the above items, taking steps to put a detailed transition plan in place, and seeking out professional advice from an attorney or financial advisor, you’ll ensure that your own financial security is taking precedence, while preventing the stress of over extending yourself.
Mary Beth Storjohann, CFP®, CDFA
Senior Financial Planner
San Diego, CA