Should I Keep the House?
One of the biggest questions and potential points of contention when going through a divorce is: what happens with the family home? Finances for any successful couple are bound to be complex and challenging to unwind. It’s prudent to keep in mind the entire potential divorce settlement including child and spousal support as well as the total division of assets in divorce rather than trying to isolate just one aspect.
If not the largest asset in your family, your home is certainly one of the most important. Choosing whether to keep it, give it to your spouse, or sell it and split the proceeds is bound to be one of your most vexing decisions when you factor in all the emotional ties and the social and community implications of moving.
Factors to Consider
There are several factors to consider in determining whether you can afford to keep the house or even want it. In addition to the costs for upkeep, maintenance and property taxes, also consider the eventual selling costs. Most real estate professionals suggest estimating total selling costs at 7-10% of the home’s value. In addition, if your home has appreciated more than $250,000 over the years, there may be income tax due.
Regardless of the value of your home, the psychological and physical reasons to stay or leave will be equally important. This side of the equation is different for every divorcing individual. Some want stability, especially if it helps the children adjust. Other divorcing men and women want a fresh start, in a place of their own without all the memories.
Facts About Mortgages in Divorce
As you are working out the finances involved in keeping your home, it’s important to keep a few things in mind regarding the logistics.
- Existing mortgage:
- A spouse who pays the mortgage/real estate taxes can deduct mortgage interest and real estate tax even if she or he no longer lives there.
- To take the deduction, the house must be jointly owned and the Marital Settlement Agreement (MSA) must stipulate the spouse no longer living there must make the payments.
- To qualify for a new mortgage:
- Maintenance/child support payments typically must have been received for six months before the mortgage closes; therefore, you need at least seven months after the divorce is final to refinance if you are counting on maintenance or child support to qualify.
- Support payments typically must continue for three years after the loan closes.
- The dollar amount received each month must match the amount in the MSA.
- If you don’t have a lot of income but have substantial investments, you may qualify for an underwriting process called an Asset Depletion Loan. This does not require you to deplete your assets; it just determines an estimated income your assets could provide to help you qualify for a mortgage.
It is important to think of the family home as a financial asset and consider the costs of keeping the home when discussing splitting assets in divorce.
- Tax reform has capped the deductibility of property and state income taxes at $10,000 and reduced the amount of mortgage that qualifies for the mortgage interest deduction.
- This makes it more expensive to own a home.
- Downsizing or renting is often a difficult, but smart choice.
While you likely could comfortably make the payments to keep the house in the short-term, the real question is can you afford the house and your other lifestyle and retirement objectives in the long run. Contact our national Divorce Practice Group for our “Should I Settle?” assessment to help you decide, and check out our latest tips on Forbes.com here.
A wealth manager and owner at BDF, Heather L. Locus, CPA, CFP®, CDFA® founded our Women’s Service Team and leads our Divorce Practice Group. She loves solving complex problems by balancing the financial and emotional components with tax and legal issues. Heather educates women and men on how to transition through new phases of life with confidence and peace of mind. She authored The Next Chapter: A Practical Roadmap for Navigating Through, and Beyond, Divorce and you can read her latest divorce tips at Forbes. She has been named one of the Best-In-State Wealth Advisors by Forbes, a Five Star Wealth Manager according to Chicago Magazine and was named a Top 200 Wealth Advisor Mom by Working Mother.
Disclosure: No representation is being made that any strategy shown will or is likely to achieve results similar to those shown in this presentation. BDF does not provide legal, tax, insurance, social security or accounting advice. Clients of BDF should obtain their own independent tax, insurance and legal advice based on their particular circumstances. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift and philanthropic planning.