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Published: Monday, October 31, 2016 @ 3:23 PM
By Mary Ballin, CFP
Learn more about Mary on NerdWallet’s Ask an Advisor
The family house is where you create and store memories. Family gathers for the holidays, babies come home from the hospital, children and pets rampage through the backyard and much more. It is the place that we retreat to when we are tired or sick. It is home.
But when a couple decides to divorce, they must figure out what to do with the house. You must weigh the pros and cons before making a decision that could be financially harmful to you down the road.
Depending on what you decide to do with the house, here are key financial issues you must consider.
Keep in mind that any mortgage on the home will need to be refinanced in the name of the spouse keeping the house, and that spouse may need to buy out the other based on the equity in the home. Like everything else in a divorce, the amount of the buyout is negotiable. Be sure to consider the potential appreciation of the home and any taxes or fees that may result from a future sale.
Before agreeing on a buyout, you’ll need an appraisal. In order to get an appraisal both of you can agree on, I would suggest at least two appraisals. If they are significantly different, you may need to get a third or agree to a number that is somewhere in the middle.
If you want to keep the house, consider whether you can afford it. Can you buy out your ex? After the divorce, will you have enough other assets and income to live on and maintain the home? Consider all the costs of owning your home, not just your mortgage, property tax and insurance payments.
Depending on your divorce agreement, one partner may get the house and the other partner a greater share of other assets. Don’t forget: Cash is king. You can’t pay for groceries with a brick from the house. Remember that, while you may receive alimony or child support, you probably won’t get them forever.
If you can’t reach an agreement so one person can own the house, both of you could continue owning it as a joint asset after divorce. However, consider whether you want to stay attached to each other financially and whether you’re certain you can depend on your ex-spouse-to-be to keep up his or her end of the financial bargain — house payments, maintenance, expenses and taxes.
Beyond the emotional considerations — leaving behind memories, moving on and creating new memories somewhere else — there are important financial considerations for navigating the sale of your house. If the house has appreciated significantly, there may be capital gains owed on the sale. For example, for a married couple in California, the taxable amount will be capital gains that exceed $500,000, and those taxes will probably be shared between the divorcing spouses. The bill will be due when they file their income taxes for the year. The rest of the transaction should be straightforward, and the split of the proceeds can be directed to each spouse’s bank account. Also be aware that sellers generally pay brokers’ commissions for both parties in the transaction.
There is no one right answer, but there can be a wrong answer if you don’t think through the pros and cons. You don’t want to be stuck with a house you feel financially trapped in, hounded by expenses. And if you sell the home, to your ex or another party, you don’t want to walk away without enough money for your future.
Working through these decisions with a trusted financial professional can help you keep your eyes on your financial success. An advisor will know how to work with your divorce attorney or accountant, if needed, to ensure you have a plan that works for you and your new life.
Figure out your budget for each housing scenario before proceeding. Analyze your post-divorce finances, what you will need to spend day-to-day and what you will need to save for you and your family’s future.
This article also appears on Nasdaq.