Should You Keep the House? 4 Things to Consider When Divorcing

The marital home is often a couple’s largest asset, but it can also be their largest debt. It’s the place where families are started, children are raised, and memories are shared. After divorce, there are typically strong feelings about the marital home, given that it’s commonly the asset with the most emotional ties for the family.

Besides all the emotions and fond memories wrapped up in the property, there are several financial and social implications to consider when deciding whether it’s in your best interest to keep your marital home after divorce. In this article, we’ll discuss four of these considerations.

1. Affordability

Likely, the most important consideration when weighing your housing options post-divorce is the affordability of the property. A home that was once affordable for a married couple might not be sustainable on a single income.

Consider if your income, any spousal support you receive (or are obligated to pay), any child support you receive (or are obligated to pay) and your liquid assets are enough to balance all the home expenses that could enter the picture. It’s important to be realistic about the costs of upkeeping your home.

You should consider fixed expenses like mortgage payments, property taxes and utilities, and keep in mind maintenance and general house upkeep as well. Maintenance costs will fluctuate, but we believe budgeting roughly 1% of the home’s value every year would likely provide a safe buffer.

It’s also important to think about whether selling the home will help you achieve your financial and retirement goals. Owning more liquid assets—which may appreciate at a faster rate than the home and provide you with more liquidity and cash flow—could be a better fit for your spending and savings goals in the future.

If you decide to take over the home mortgage, you will likely need to refinance it to remove your ex’s name. Refinancing can be costly, and you risk the new interest rate being higher than your current rate. Additionally, spousal support and/or child support payments must typically be received for at least six months post-divorce to qualify as income for the purpose of a refinance.¹

If spousal support and/or child support is not expected to be a part of your settlement and you instead plan to use investment assets to fund your mortgage payments, qualifying for a loan may be more difficult. You should begin these discussions with a mortgage broker well before your divorce is finalized in order to map out a game plan and ensure you can qualify for a loan.

2. Tax impact

A topic that is often overlooked is the tax implications of selling your home. If your home has appreciated in value over the years, you are eligible to exclude a capital gain of $250,000 if filing single or $500,000 if married and filing jointly.² That means if you become the sole owner of the property and then sell your home, you will owe tax on any gain from the sale exceeding $250,000.

To break it down a bit, let’s assume you purchased your home for $500,000, and now you can sell it for $800,000 as a single filer. In this case, there would be a $50,000 taxable gain ($800,000 - $500,000 = $300,000 gain - $250,000 gain exclusion). Depending on your income, that could cost you approximately $7,500 to $10,000 in capital gains tax.

On the other hand, continuing with the example above, if you sell the home while you and your ex are still joint owners, the combined exclusion of $500,000 would erase your tax bill altogether.

To receive this exclusion, the following two criteria must be met:

1. You must have owned the home two out of the last five years prior to the sale date.
2. You must have used the property as your principal residence at least two of the last five years prior to the sale date.

It’s important to note that only one spouse needs to use the home as their principal residence (see #2 above), but both spouses need to remain owners (see #1 above) to each qualify for a $250,000 exclusion ($500,000 in total). Because of this, it’s common to see both spouses remain on the title of the home post-divorce to qualify for the double exclusion. This may not be a good solution in every case, but it’s a strategy to consider if you plan on moving or selling in the near term and a significant capital gain is involved.

The mortgage interest tax deduction is another homeowner tax benefit. In situations where you utilize the itemized deduction, mortgage interest and real estate taxes paid for that year are deductible against your taxable income. The spouse who pays the mortgage and real estate taxes is the only one who may deduct the tax and interest on their return. Please note that this person does not have to live in the home in order to qualify.³

3. Emotional and social impact

In addition to the financial implications, it’s important to consider the emotional aspects of this decision, which are often more difficult when children are involved. In some situations, moving provides a fresh start, while a new space of your children’s own can be exciting for them and help them adapt to the big changes in their lives.

However, moving is stressful and may add additional strain on you and your kids during an already tumultuous time. We think it’s important to consider the benefits of remaining in the same school district (especially if your children are excelling in their studies) and the close ties and sense of community you and your kids have with the neighborhood and neighbors. Staying in the home can provide some stability and familiarity to your kids, which may help them adjust better to the divorce.

While many divorcing individuals plan to sell the family home as soon as the kids go to college, it may be smart to consider selling it sooner or later than that. College is a highly transitional time for young adults, and keeping the home longer can provide them with a familiar and comforting place to come home to during the holidays and the summer. College kids often want to see their high school friends on breaks, but if neither parent still lives in the school district, the child may choose to sleep at a friend’s house rather than at either parent’s.

If it’s not affordable to keep the family home, or if neither spouse wants it, sometimes it makes sense to move before the kids graduate high school so they can adjust to new rooms in a new home prior to leaving for college. Selling the family home before college costs accumulate can also help families determine what is affordable for college-related expenses.

There has been an increase in divorcing women and men choosing to rent rather than immediately buy a new home. Renting is an option that we think should be considered, especially if the current location of the marital home is not where you envision yourself living for the long term.

4. Take a step back – The big picture

Besides the financial, emotional and social implications of the marital home, we recommend considering your ex’s priorities as well. Reflect on why your ex may or may not want the home. So much of divorce is about give and take, weighing each party’s wants and needs. If you’re open to giving up the house, could you instead negotiate more liquid assets to fund an enjoyable family vacation? What other opportunities could arise from freeing your ties with the family home? Although you may have an immediate emotional reaction to the situation, it can pay to be open-minded, look at the situation from all angles, and explore all viable possibilities.

¹ https://www.divorcelendingassociation.com/blog/can-you-use-divorce-support-income-for-getting-a-mortgage-.cfm
² https://www.irs.gov/taxtopics/tc701
³www.irs.gov/faqs/itemized-deductions-standard-deduction/other-deduction-questions

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