Divorce can feel as though everything you thought you knew about your life and your future is suddenly flipped upside down. It can be a struggle to make sense of the pieces that remain. It is common for one spouse to want to stay in the family home and retain some resemblance of normalcy, especially if there are children involved. While it may seem like staying in the house offers you some stability, be aware that it may also be a very costly mistake.
Let’s look at the big picture.
A house is a type of asset, and just somewhere to live. It’s real estate. It does not provide income, even though there is typically appreciation to be had as a long term asset. If you and your spouse lived there for a long period of time, it’s highly likely there is a large chunk of equity trapped in those walls. If you are awarded the family home in the divorce, it could be the largest fixed asset in the settlement. Let’s assume the home has a market value of $1,200,000 and there is $700,000 in equity. As marital property, half of that equity is yours, but the other half is your spouse’s. So, if you keep that home, then a full $700,000 of your settlement will be tied up in that property. That same money could generate over $30,000 a year in income if it were invested conservatively. You also have to consider the costs of upkeep and maintenance that will increase the amount of income necessary for you to make ends meet. That upkeep converts to cash that you will have to be responsible for and can affect your personal finances.
The potential tax impacts down the road could be staggering. If you were to sell the house while you are still married, $500k of that $700K capital gain would fall under the marriage exclusion and be tax-free. Once you transfer that home into your own name and if you sell it with a gain of $700k, the personal exemption is only $250k so you will owe capital gains tax on 450k of gain or $67,500! Not to mention the costs involved with selling a home. Those typically range from 8-10% of the sales price, depending on where you live. These are two things I always advise my clients and their attorneys to think about and take into consideration before finalizing a divorce settlement.
Divorce is difficult but you also have an opportunity for a fresh start. Getting off on the right financial footing is essential to your future. To be certain that you understand all of the ramifications of any property settlement you are considering, make certain to include a Certified Divorce Financial Analyst® . You only have one chance to get your divorce settlement right – so it’s best to take the time you need and gather the information necessary to make the right choices. It will be the best decision you ever make.