Should Your Divorcing Friend Keep the Marital Home?
The home is often one’s biggest asset and biggest debt. It is where families are started, children are raised, and memories are built (good and bad). It is also commonly the asset with the most emotional ties. There are several financial, emotional, and social implications your divorcing friend should consider when deciding whether to keep the marital home after a divorce.
A home once affordable for a married couple might not be sustainable on a single income. If your friend is considering keeping the home after their divorce, it is wise for them to ensure their income, maintenance, child support, and liquid assets are enough to maintain the mortgage, taxes, utilities, and general house upkeep. It is also important for your friend to consider if selling the home will help them achieve their financial and retirement goals. Keeping the house in lieu of more liquid assets that may appreciate at a faster rate than the home and provide your friend with more liquidity and cash flow could force them to make meaningful adjustments to their spending and savings goals in the future.
If your friend decides to take over the home mortgage, they will likely need to refinance it to remove their ex’s name. Refinancing can be costly, and your friend risks the new interest rate being higher than their current rate. Additionally, maintenance and/or child support payments must typically be received for at least six months post-divorce to qualify for a refinance. If maintenance and/or child support is not expected to be a part of their settlement, and they instead plan to use investment assets to fund their mortgage payments, qualifying for a loan can be more difficult. Your friend should begin these discussions with a mortgage broker well before their divorce is finalized to map out a game plan and ensure they can qualify for a loan.
Understand the Tax Impact
If your friend’s primary home has greatly appreciated over the years, they can exclude a capital gain of $250,000 if filing single or $500,000 if married filing jointly. For example, if your friend becomes the sole owner and sells their home, they will owe tax on any gain from the sale exceeding $250,000. If your friend sells the home while they and their ex are still joint owners, the combined exclusion of $500,000 may lessen their tax bill or prevent them from paying any tax on the appreciation. To receive this exclusion, the following criteria must be met.
- Your friend must have owned the home two out of the last five years prior to the sale date.
- Your friend must have used the property as their principal residence at least two of the last five years prior to the sale date.
It is important to note that only one spouse needs to use the home as their principal residence (#2 above), but both spouses need to remain owners (#1 above) to each qualify for a $250,000 exclusion ($500,000 in total). Because of this, it is common to see both spouses remain on the title of the home post-divorce to qualify for the double exclusion. Of course, this can complicate things and will not be a good solution in every case. However, it is a strategy to consider if your friend already planned on moving or selling in the near term and there is a significant gain involved.
The mortgage interest tax deduction is another homeowner tax benefit. In situations where your friend utilizes the itemized deduction, mortgage interest and real estate taxes paid for that year are deductible against their taxable income. The spouse who pays the mortgage and real estate taxes is the only one who can deduct the tax interest on their return, and this person does not have to live in the home.
Emotional and Social Impact
In addition to the financial decisions, it’s important to consider the emotional aspects of this decision, which are often more difficult with children involved. In some situations, moving provides people with a fresh start, and a space of their own can be exciting. However, moving is stressful and can add additional strain to your friend and their children during an already tumultuous time. It’s important to consider the benefits of remaining in the same school district, especially if the children are excelling in their studies, and the close ties and sense of community your friend and their children have with their neighborhood and neighbors. Staying in the home with their children may provide stability and familiarity, which can help them adjust better to the divorce.
Please reach out to TheNextChapter@bdfllc.com if you have a friend that would benefit from additional resources on navigating the decision of keeping or parting with the martial home.
I joined BDF in September 2020 as a Planner. I graduated with an Economics degree from Bucknell University in May 2020. As a planner, I create and review extensive financial plans and retirement projections, build ongoing client relationships, and help take care of clients’ financial needs. I am currently working towards becoming a Certified Financial PlannerTM professional.