One of the most common concerns in divorce, after custody of the children is whether one spouse should continue living in the marital home. Most likely, the home has significant emotional meaning as it probably represents heartfelt memories of raising your family during happier times. It could provide the expectation of a smoother transition by trying to maintain the “status quo” as much as possible for your children (and yourself too). While these reasons are certainly understandable and meaningful, it is crucial to also consider the financial factors in deciding whether to stay in your home. The following are some factors which everyone should think about before reaching a decision.
Liquidity – The home can often be one of the largest assets on the marital balance sheet which can create a potential cash flow issue if you are the one remaining in the home. If you owned the home jointly while married, one party would need to “buy out” the other. This can potentially have a negative short-term and/or long-term financial impact on the party who chooses to remain. Buying out the other party means you elect to forego other liquid assets (in the property settlement) to retain your spouse’s share of the equity in addition to yours. How will this impact your liquidity in the future?
Expenses – Any home will be accompanied by significant monthly outflows. Monthly costs can include real estate taxes, utilities, insurance, ongoing maintenance such as landscaping, painting, and even miscellaneous repairs or improvements. If you have an outstanding mortgage on the home, this will put an additional strain on the monthly cash flow. Review in detail what the monthly costs were over the last year and if any additional costs will be necessary over the next year or two.
Taxes – When a married couple (filing jointly) sells their primary residence, the sales proceeds (net of certain selling costs) are potentially taxable to the extent they exceed the adjusted cost basis in the home. As a married couple (filing jointly) if you meet certain requirements, you may be entitled to a primary residence exclusion of up to $500k to help mitigate the taxable gain.
When buying out your spouse’s share of the marital home, his/her portion of the home’s original cost basis (and adjustments to the cost basis) is added to yours. That means that any appreciation in value during the marital years is now yours – as well as the associated tax liability. To make matters worse….if you sell the home post-divorce, the actual tax liability on those gains may be greater, since your principal residence gain exclusion amount would likely be $250k (single filing tax status) instead of the $500k you may have qualified for as a married couple.
Emotional Reasons – Remaining in the marital home is often viewed as the “safest” route when considering other viable options. Remaining close to friends and neighbors can be additional support and very important to everyone.
Alternatively, consider if it would be better to find a home that provides a fresh start while better suiting your needs (i.e., specific features, layout, location). Perhaps your marital home was your spouse’s dream home, but not yours. Finding a home that best suits your future needs, style and budget could be a healthy way to start a new chapter in your life.
How to sort it out – When starting this process, the best way to approach it is to first consult with your attorney to determine the possible options for property settlement and marital support. Once you have this information, you should sit down with a financial advisor/CDFA® to determine what you can comfortably afford with your projected net worth and income.
The decision whether to keep or sell the marital home is both an emotional one as well as a financial one. Take your time with this decision and utilize all resources available to you. The emotional wounds will heal over time, but the negative financial impact of staying in a house that you cannot afford is one that will not fix itself over time.