This is the eighth post in my “Divorce & Your Money” series.
“Who gets the house?” is the biggest question for many divorces.
Your answer comes down to three options:
- Sell it now. The couple could agree to put the house or apartment on the market, sell it, and split the proceeds 50/50 or otherwise. Both move somewhere new. This is in many ways the cleanest and simplest option, but it doesn’t make sense in every situation.
- Sell it later. Many couples decide to continue owning the property jointly until a predetermined date, such as when the kids graduate from high school. At that time, they plan to sell and split the money 50/50 or otherwise.
- Keep it. One spouse keeps the home and usually “buys out” the other with other assets or a series of payments.
How do you decide which is the best course of action for your individual situation? There are several factors to consider:
- Cash Flow. Can you afford to stay in the home with one income instead of two? Perhaps it is affordable when income from spousal and/or child support is being received, but the expense would quickly become unsustainable without it. I feel this is the most important consideration – you don’t want to figure out that you can’t afford it after depleting your other assets.
- Liquidity. Real estate is an illiquid asset. When you do want to sell, the process can take months (or more than a year in some markets). Is one spouse trading an illiquid asset (the house) for more liquid assets (like savings or brokerage accounts)? This may be okay, but should be understood up front.
- Alternatives. How does your current housing expense compare with the other options available to you? Suppose the couple has a small mortgage in an area where property has appreciated greatly. He or she would not be able to afford to rent or buy in the area if starting out today. On the flip side, a mortgage that was a “stretch” in the best of times for the couple will almost certainly be a financial burden after divorce.
- Future Plans. Are you planning to move out of the community? If so, it probably makes sense to sell the house sooner rather than later.
- Real Estate Market. Real estate prices are a local thing. It may not make sense to sell now if prices are expected to rebound in your area.
- Emotional Attachment. I put this last because I hope the more concrete issues are considered first. Staying in the home may be very important to one spouse, and that must be taken into consideration as well.
Whichever option you decide, other issues remain:
Market Value. If you sell the property, there is no question about the value; it is what a buyer will pay. If one party is planning to keep the property, there may be disagreement regarding the value.
Keep in mind that each spouse has the opposite financial incentive: the person keeping the property would benefit from a lower value, while the person taking other assets would benefit from a higher valuation. The best course of action is to get an objective appraisal. (Estimates at online sites are not enough; an appraisal from a live person is recommended.)
Ownership and Title. Jointly owned property can be transferred to one owner by Quitclaim Deed. Consult a real estate attorney.
Mortgage Responsibility and Qualification. If a non-working spouse plans to stay in the home, keep in mind that he or she needs a history of income to qualify for a mortgage. This requirement may be met after one full year of alimony payments has been made.
Tax Issues. Will sale of the property (now or later) generate a taxable capital gain? If so, is the tax liability accounted for in your financial settlement? There are special rules regarding the exclusion of capital gains pertaining to divorce. Consult a financial expert.
Division of real estate is an important part of most divorce settlements. Be sure to consider all your options carefully.
Please note, changes in tax laws may occur at any time and could have substantial impact upon each person’s situation. You should discuss tax or legal matters with the appropriate professional.
Please visit our new blog at PowerOverDivorce for more information about Divorce Financial Planning.