Some people think the house is the trophy. Most likely it will prove to be the booby prize. Financially, it can become a rock around your neck. How so? Think about it: When you bought that house, your household income was double, or more, of what it will be in the future. That house was suitable for two adults and now there will be only one.
You needed to accommodate all your children, all that time, and now they may be leaving the nest, or will be there only part-time. You may say you want to keep the children in the same neighborhood and schools. Let me suggest that if things were different, and life was wonderful, and you had the opportunity to build a new home elsewhere, you would be moving those kids without hesitation and feel really good about it. I hope I have your attention and we can consider some alternatives.
1. Sell It Now
Selling the house will give you and your spouse the cleanest break from this jointly-held asset. Notice, I don’t call it an investment. A house is not an investment. It is a place to live and costs a lot of money to maintain. In addition, you pay (not earn) interest on it and pay property taxes repeatedly on the same money, some of which is yours (the equity) and some that is not yours (the mortgaged amount).
Proceeds from the sale can be divided appropriately along with other assets in the marital estate, thereby allowing you to select a home that is more in line with your needs and new financial situation. In anticipation of selling the home, no appraisal will be needed. Save a few dollars, because the market will tell you the value. It does not matter what an appraiser’s opinion is if you are going to put it to the ultimate market test.
If you need to spend money for minor repairs, or to prepare the home for optimum marketability, use any open home equity line of credit for funds. This keeps the expenses of selling the home within the resources of the home. That also means one less thing to negotiate.
2. One of You Keeps It
If it makes financial sense for one of you to keep the house, be sure you both look at this from every angle. The one who is keeping it will effectively be buying the second half of the house from the other spouse. This should be treated like any other real estate purchase: get an appraisal, get a home inspection, complete a title search for any unknown liens, and negotiate any imminent major repairs. That is what any prudent buyer would do. Then do an additional title search – immediately preceding final settlement – to be sure there are no new liens, like your spouse’s attorney’s bills, against the property.
The surrendering spouse will want to come off the deed via a “quit claim.” This, however, does not remove that spouse from any mortgage that is in both your names. Only a refinance by the spouse keeping the house, in their name only, will relieve the surrendering spouse of debt responsibility. Therefore, the spouse keeping the house needs to feel confident that they will qualify for an individual mortgage. It is highly recommended that you talk with lenders prior to agreeing to keep the house. But remember, mortgage qualifications are not your best measure of whether keeping the house makes financial sense for you. They are simply measures of how much risk the lender is willing to accept to get your business and put you in debt.
Unique to the circumstances of divorce, in such real estate transfers, is that any tax load in the house will transfer to the ex-spouse who keeps the house. This can include capital gains tax liabilities from previously owned primary residences if the current residence was purchased before May 7, 1997 under old tax rules. Or, if the house was used for a home-based business, and home-use tax deductions were taken, the assuming spouse will pay recaptured taxes on those deductions when the house is ultimately sold. These are complicated issues and should be clarified for you by a financial or tax professional.
3. Sell It Later
If you and your spouse agree that it is mutually beneficial to sell the house later – when the market is better, when more equity has been built, etc. – then there are a couple of options. Whatever you do, realize that retaining joint ownership is a business partnership and should be structured as such.
One option is to rent the house to a third party at a level that makes it a profitable business endeavor, while each of you live elsewhere more cheaply. Establish a joint business banking account for rent receipts and from which to pay landlord expenses. Agree ahead of time on what your contribution shares will be if the account falls short, and/or how proceeds will be divided when the house is eventually sold.
Another option is that one of you will remain in the house, as a “tenant,” while you both function as landlords. The tenant ex-spouse pays rent at a fair market rate to the joint business account, and all landlord-type expenses are paid from that account, including the mortgage(s). Agreements need to be in place regarding minor repairs that will be the tenant spouse’s responsibility and more major expenses that fall into the landlord category.
The benefits of both these options are that both ex-spouses share the risks associated with selling the house later. These include things like: “market risk,” fluctuations in the value of the house; “structural risks” that some undiscovered problem emerges, like mold, radon, or a foundation fault; or “hazard risks” that may not be completely covered by insurance, like fire, flood, tornado, etc.
The house can often be the single largest asset in a marital estate. Decisions you make in this regard may determine your future financial stability. Take the emotions out of it. Yes, there may have been some good memories associated with that home, but if you are divorcing, there are probably just as many that you do not want to remember. If you are going to move on with your life, then really move on, and make you best financial decisions as if starting with a clean slate.