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Should I Keep the House?: Real Property in Divorce

In most divorce cases where the couple owns a home, one party will have it awarded to them in the divorce settlement. Being awarded real property will have implications in terms of ongoing costs, refinancing, and taxes. Before you agree to (or ask to) be awarded the family home, consider these factors.

Asset vs. Liability

As you divvy up your marital estate, the family home will appear as an asset on your Inventory and Appraisement. And yes, your home is an asset that has significant value. But there is a flip side to this asset: the host of liabilities (or expenses) that come with home ownership. The shortlist includes maintenance and repairs, taxes, insurance, mortgage payments, HOA dues, and the cost of repairing damage from acts of God — not to mention utilities and other miscellaneous expenses. Make sure you can afford the upkeep. The best thing to do at this stage is to engage in a budgeting exercise as you prepare for your mediation.

Refinancing

Typically, a divorce decree will call for the party awarded the family home to refinance the existing mortgage so that the party who was not awarded the home will be free of any ongoing financial responsibility.[1] There is often a window of 30- to -90 days for this process to take place. If you have good credit, reasonable levels of debt, and a comfortable income, then refinancing likely won’t be a problem. If you’ve got poor credit (or no credit), high levels of debt, or aren’t earning much income, you may find refinancing a significant (and possibly expensive) challenge. 

Again, before you agree to (or ask to) be awarded the family home, assess your fitness to refinance. If you still want to keep the family home but believe you won’t be in a good place to refinance within 90 days, work a longer window of time for this process into your settlement agreement.

Taxes

There are two types of taxes to be concerned with as a homeowner; the first is property taxes. The appraised value of your home has a direct impact on your property taxes, so consider that tax bill carefully as you assess your fitness to keep the home. Should you be awarded the home, consider protesting your tax appraisal each year to keep your tax bill as low as possible. There are law firms in most cities that specialize in protesting tax appraisals, but you can also DIY if you like.

While local property taxes are deductible on your federal income tax, that amount is now capped. In addition, this deduction is only available if you itemize — and given the increased standard deduction effective as of 2018, many more households than before are choosing not to itemize. There is almost never an incentive to pay more in property taxes than absolutely necessary.

The next type of tax to consider is capital gains taxes. If you choose to sell your home, you may end up with a tax bill that you didn’t expect. Under current tax law, an individual taxpayer may exclude up to $250,000 in capital gains on the sale of a primary residence. So, if you and your ex-spouse purchased the home for $250,000 and it’s now worth $500,000, you’re in the clear. But if it’s now worth $600,000, you’ll be paying capital gains taxes on $100,000.[2] That bill could be as much as $20,000.

If you plan to sell the family home in the near future, you may wish to examine potential tax consequences before you commit to this plan of action.

Dividing the Equity

For most couples, the family home is one of the most valuable assets they own. If there is significant equity, dividing it can become tricky — especially if there aren’t many other assets to be divided. If buying out the other party’s equity with other marital assets, selling the home now, selling the home later, or a cash-out refinance are not viable options, you may wish to consider the use of a Property Settlement Note. You can find a deep dive on this topic in my article Dividing the House: Creative Equity Division Techniques in Divorce (November 2019).

Getting Help

You may think this is where I’m going to talk about hiring a handyman (a good idea for any homeowner), but not so. In some cases, the choice to keep the family home or not is a simple one that you and your attorney can make together or that you can make on your own. In other cases, this choice may be more complex. If you find yourself struggling to figure out the best thing to do, consider adding a Certified Divorce Financial Analyst™ Professional (CDFA®) to your team. A CDFA® Professional can help you figure out which questions to ask and then provide the analysis and insights to answer them.

As they say, an ounce of prevention is worth a pound of cure — and working with a team of experts to craft the best possible settlement will often pay off in the long run.

Thinking of adding a CDFA® to your team?

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[1] For example, should the spouse that is awarded the home stop making mortgage payments, if the other spouse’s name is still on the note, the lender can go after the other spouse for those payments – regardless of what the divorce decree says.

[2] Depending on your adjusted gross income, your capital gains tax rate could be 0%, 15%, or 20%.