Your primary residence is likely your most valuable asset, thereby causing a lot of problems when divorce does occur. This article outlines the financial issues that you need to consider when facing divorce and how to handle your home.
Country music singer Mark Chestnutt touched upon the simplicity of owning a home and going through divorce in his hit song “Goin’ Through The Big D”:
“…Bought her a house like I said I would, in sub-divided neighborhood…
I can’t believe what the judge had to tell us, I got the Jeep she got the Palace…”
Unfortunately, the separation of the primary home is not quick and easy. Furthermore, if there are children involved, you will have additional issues, both emotional and physical, that need to be addressed. Will the children be able to see their friends? Will they be changing schools? How often and where will they visit the non-custodial parent? What will their new home be like? Can they keep all of their stuff?
Assuming you can get past the issues with the children, there are a lot of tough financial decisions that need to be made about the primary residence, including, but not limited to:
1. Will you sell the house? If so, when?
- Do you have a taxable gain on the house?
- Are you going to sell in connection with the divorce to take full advantage of the $500,000 gain exclusion?
2. If you are going to stay in the house, who will be responsible for:
- The mortgage payments?
- The basic monthly maintenance, insurance, and upkeep?
- The large repairs and improvements?
- Getting the benefit, if any, of future increase in value of the home?
- The required maintenance of the home if it’s not kept up to your standards?
3. Registration issues that you need to consider:
- Will you change the deed on the property?
- Who will stay on the mortgage note?
- What if you want to refinance and now you don’t have your spouses’ income to use to secure a mortgage?
Presently, the laws allow the first $250,000 gain, per person, to be excluded from the sale of your primary home. So, if you have been living there a long time, and have a large gain, you should seriously consider selling the house in connection with the divorce so you can fully utilize the $500,000 gain exclusion. Also, if you have a taxable gain, you need to confirm whose tax liability it belongs to; usually it rests with the one who retains ownership, however, during the equitable split of the assets, the potential tax liability should be addressed. Losses on a primary home are not a tax deduction, so if the value of your home has dropped, there are a few less issues to deal with when selling the home.
If one spouse stays in the home, but you both continue to own the home, you need to be specific about the timing and circumstances of the upkeep that the home requires. Also, you need to outline the terms and conditions of a future sale – such as when the home has to be sold and how will the proceeds will be split, net of taxes. If the house is not the primary residence of one owner, be aware that you may not be entitled to the full $250,000 gain exclusion.
The financial burden of paying for the house is also crucial. The ability to retain the existing mortgage is usually a necessity of the resident spouse to enable them to afford to keep the home. Reviewing the mortgage options and alternatives should be done prior to any final transfer or settlement.
As Mark Chestnutt continues: “…Things like this are never final; I’m still payin’ on the vinyl…”