This is the sixth blog in the Divorce and Finances series, addressing common questions I hear as a Certified Divorce Financial Analyst (CDFA) during the pre- and post-divorce process. This blog will address questions around divorce and the family home. A podcast version of this blog series can be found on our resource center here.
Should I stay in the family home after divorce, or should I sell it and downsize?
The decision of whether to stay in the marital home or sell it is often a difficult, but crucial one. While the emotional aspect of moving and uprooting children often leads the decision, it should never be the only factor.
What factors should one consider when staying in or selling the family home after divorce?
- Cash flow: The first question to ask yourself when trying to decide is – will you be able to afford the monthly expense given your expected new lifestyle? What would be your monthly costs to live there? There is usually a mortgage payment, property taxes, annual maintenance costs as well as utilities and all those unexpected repairs. Will it work with your new budget? If it seems that the numbers would work out monthly – great.
- Assets forfeited: The next question to ask is what assets you would be giving up for keeping the home in the divorce settlement. If the home is owned jointly then 50% is yours and 50% belongs to your spouse. For you to own it entirely after the divorce, you would need to pay your spouse for their share of the home with some of the marital assets. This would have a negative impact on the amount of liquid assets you would receive upon settlement of the divorce. Will taking the home now leave you with enough assets for your long-term needs? What about retirement? Would it have been better to sell the home now and downsize or even possibly rent?
- Mortgage: Another consideration is that if a spouse is being bought out, then they will no longer want to be responsible for the mortgage and so it may need to be refinanced to proceed forward. Qualifying for a mortgage after a divorce could also be a struggle if the ex-spouse was the primary breadwinner.
- Taxes: Lastly, the tax impact needs to be considered. As a married couple (filing jointly), if you meet certain requirements, you may be able to exclude up to $500k of gain to reduce any potential capital gains. If there is a tax liability related to the sale of the home while still married it is factored into the settlement of assets and debts. When you buy out your spouse’s share of the marital home after-divorce, their portion of the home’s cost basis is added to yours. That means any appreciation in the home during your years of marriage is now yours as well as the associated tax liability. To make matters worse, if you sell the home post-divorce, the actual tax liability on those gains may be greater since your principal residence gain exclusion amount would likely be $250k (no longer married filing joint tax status) instead of the $500k you may have qualified for as a married couple.
For more relevant blogs on divorce finances, please check out the other articles in the series: