If you’re divorcing, you’ve no doubt been asked “Will you get to keep the house?” It seems that in many divorces, the marital home can begin to feel like kind of a prize, something to fight for. It’s almost as though there is an unspoken notion that the spouse who moves out appears in some ways to have “lost.”
Granted, the marital residence carries significant symbolic and cultural weight. After all, “Home is where the heart is” –or so we’re told. In addition, for many couples, the marital home is their largest single asset. But does that mean the person who gets the house “wins?” Is there any financial truth to that idea?
Since both financial and emotional factors weighing heavily on the decision, handling the marital residence in divorce is an excellent opportunity to Think Financially, Not Emotionally® . As difficult as it may be at first, you need to make decisions about your home based on thoughtful analysis of the value and cost of retaining the property as an asset –not on emotions.
So, with your financial thinking cap on, here are four important questions to ask yourself in evaluating whether to keep your marital home:
Can you afford the real cost of owning it – now, and in the future?
There’s much more to keeping the house than just getting to live there. Think carefully about what it will cost you to own the property, and whether you can sustain those costs while still ensuring your secure financial future. Your primary residence might be an impressive property with many enviable amenities. However, the larger your home, the more truly expensive it is to own. Make sure you’ve considered:
None of these will get less expensive over time, and the older your house gets, the more maintenance and repair it will need. It’s easy to want a house with a new roof, sparkling swimming pool, and top-notch appliances, but project yourself ten or twenty years into the future. How might you feel about tackling those replacements?
If your income won’t keep up with these demands on it, you may conclude that a more modest property would make better financial sense.
Can you refinance the mortgage?
If you are going to keep the house, your husband will almost certainly want his name off the mortgage; however, refinancing the mortgage in your name alone presents its own set of challenges. For starters, you will have to meet federal requirements concerning your debt-to-income ratio. While it’s true that income from alimony or child support can be used to qualify for a mortgage, be mindful of this critical catch: It can only count as income after there’s a documented history of those payments having been reliably received. Mortgage lenders know how often ex-husbands default on support payments, so they proceed with caution.
If a “jumbo” mortgage (defined as more than $417,000, in most markets) is involved, the hurdles are even higher.
Can you sell it when you want to?
Your home can be a tremendously valuable asset – but you’ll only fully access that value if and when you sell it. In deciding whether the marital home is an asset you want to keep, consider what the housing market conditions are where the property is located.
Projections of future conditions are especially important – and no matter how rosy the outlook, there are no guarantees. How long do you expect to live in the house? What are the most reliable projections for housing market conditions in that time span? Can you live with the inherent uncertainty of even the best projections?
Can you handle the tax implications?
If you sell your house for more than you paid for it (plus any capital improvements), you may have a significant taxable capital gain, even after taking the $250,000 exclusion you’re entitled to as a single woman. You’ll need to pay both state and federal taxes on that gain, and those taxes are on the rise. The federal maximum was raised in 2013 from 15% to 23.5%, and there have been proposals in 2015 to raise it further, to 28%.
Here’s a simple example: Let’s say you originally paid $200,000 for your house, which now has an appraised fair market value of $1,000,000, and you’re going to sell it for that much. Your selling costs are 6% or $60,000. The $1,000,000 sales price minus $60,000 selling costs = $940,000.
Subtract from that your original purchase price: $940,000 – $200,000 = $740,000 profit.
Subtract the $250,000 tax exclusion you are allowed on the capital gain from sale of your primary residence: $740,000 – $250,000 = $490,000 in capital gain.
For simplicity’s sake, let’s assume your total capital gains tax rate is 20%. You will now owe the federal government 20% of $490,000, which is $98,000. If the capital gains tax rate increases to 28%, you’ll owe $137,200. (And that doesn’t include state capital gains tax!)
Work through the likely numbers for your own property, so that you’ll know ahead of time what your capital gains tax hit is likely to be, and whether you can handle it.
If you approach the decision of whether to keep the marital home through the lens of critical questions like these, you might conclude that yes, you’re in excellent shape to meet the challenges of hanging on to it, and that furthermore, it is what you really want to do with your money. However, it’s also possible you’ll realize that keeping the property isn’t a wise move, financially. If that’s the case, please don’t think of giving up the marital residence as a loss. Instead, recognize it as an opportunity to move on to a secure future in a new home that will make excellent financial sense.
Reminder: Aside from the end of the marriage itself, there are few considerations more emotionally charged than leaving the home in which you were married and perhaps raised a family. I know it can be a difficult, wrenching decision. However, I urge you to put emotions aside and consider keeping the house to be a financial question. Should it make more sense to move, you can make your next house a lovely home as well – with the security of knowing it isn’t risking your financial future to do so.
Hot tip: If you’re not sure what housing market conditions are in your area, consult a real estate appraiser . You’ll get a good understanding of the local market and the value of your home in that context.
Legal matters: If you do opt to keep the marital residence as your own asset after your divorce, be sure to remove your ex-husband’s name from all the legal documentation related to it. This may require a visit by your attorney to the Registry of Deeds, or the equivalent agency in your state.