When it comes to dividing assets in divorce, the issue of “what happens to the house?” is usually one of the most contentious and emotional issues a couple must address in reaching a settlement. Why is the house such a big deal? In most marriages, real estate, in the form of the family home, represents the largest jointly owned asset up for division. Secondly, but of no less equal importance, can be the emotional attachment many feel with their home, especially if they are raising children.
When trying to come to terms with how their house is to be divided, divorcing couples usually agree to one of a few basic settlement options, including:
– liquidating the house and sharing the proceeds, or
– allowing one spouse to keep the house by “buying the other out” of their equity share.
Are you in the process of divorce? Here’s a look at the pros and cons of each of these asset division options.
Liquidating the house: When a couple decides to sell their house as part of their divorce, it can be an effective way to free up equity in the martial property, which is then generally split between spouses. Each party can then walk away free to start over in the home buying process with what hopefully amounts to a substantial down payments on a new house.
The cons of making this decision to sell? In most cases, if you fail to roll over the “capital gains” proceeds from selling the house into buying a new one, you may be on the hook to pay taxes on this profit.
Something else to consider? Some spouses don’t like the liquidation option because they really want to stay in the home. However, before deciding to fight liquidation in order to hang onto home ownership, carefully consider one bottom line issue: can you afford the house all by yourself? What are the costs involved with maintaining the home? What about the mortgage? To remove your spouse from the mortgage, you will most likely need to go through a mortgage refinance program that comes with associated fees and closing costs. Are you financially prepared to pay these on top of everything else?
Assuming ownership of the home: There may be many valid reasons why one spouse wants to stay in the home after the divorce. In order to do this, one spouse generally needs to be “bought out” by the other spouse for their share of the home equity; the spouse being bought out also gives up obligation for any remaining mortgage debt.
Some couples work this out like a true real estate transaction with money changing hands. Others create agreements with stipulations such as one spouse keeps all equity in the home and assumes sole ownership, while the other spouse will get to keep their retirement plan without dividing it. These kinds of agreements are then written right into the divorce decree.
The downside of this kind of arrangement? For the spouse giving up their share of the home for the ability to keep a retirement asset, other types of tax issues can crop up. For example, if the wife keeps a house with $500,000 equity, this asset generally has a capital gain exclusion come tax time. However, if the husband keeps a 401(k) retirement savings plan worth $500,000, he will sustain an unavoidable tax liability—one-third of it could go to taxes.
Given these pros and cons, how should you divide your home? To discuss which factors might apply in your situation, please contact us for a free consultation. We also encourage you to read our other resources related to this topic: