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How Your Post-Divorce Home Affects Your Life

June 06, 2023
How Your Post-Divorce Home Affects Your Life

Divorces are typically emotionally wrought. As if dealing with the mental turmoil of an ended relationship isn’t enough, exes must somehow muster the fortitude to make wise financial decisions that will have far-reaching and long-term impacts.

One sizable decision is what to do with the marital home. Read on for some insightful information to aid you and your ex in your business-like transactions regarding your post-divorce home.

State Property Laws and Civility

A divorcing couple should promptly:

  1. Check whether their state is a community property state or equitable distribution state, and
  2. Check their attitudes at the door.

Both laws and emotions heavily influence how successful and expensive the dissolution of their assets could be. Poor, spiteful attitudes can lead to further court battles, additional attorney/mediator fees, and a court system that decides their fate based on property laws instead of mutually agreed-upon compromises.

Teams and Tools

The following proactive step for a divorcing couple is to gather their team and tools for making business-like decisions more straightforward when things like taxes and family law can be anything but. At the very least, each spouse will want two professionals to help them make the best decisions:

  1. A Certified Divorce Financial Analyst (CDFA)
  2. A family law mediator

Divorcing couples are highly encouraged to consider adding a divorce family therapist and tax accountant to their team. Their expertise can add up to a smoother divorce process with fewer mistakes that surface in the future. With complicated matters like prenups, retirement accounts, joint accounts, health and insurance, income disparity, debts, sacrifices, and emotional/psychological effects of divorce, the more helping hands, the better.

Finally, a tech tool, like a family app for divorced parents, is highly recommended for sharing information and funds between two households.

Post-Divorce Home Options

Options for dealing with the family home post-divorce fall into three basic categories. Divorcing couples should work closely with their professional team to determine which option makes the most financial sense.

Option 1: Sell the home.

Advantages: Selling the family home is often the simplest route for a divorcing couple. A house is a considerable expense, and often, once finances are divided, owning the same home is impractical. Selling becomes the least complicated option – the equity in the house converts to cash that is split equitably between the couple, and both parties have a clean start with their new lives apart.

If sold before the divorce is final, couples have greater tax advantages on the gains than if they sell after they can no longer file joint taxes. (Currently, capital gains taxes start at $500,000 when filing jointly as opposed to $250,000 individually.)

Disadvantages: The drawback to this option is that selling a house comes with expenses such as the costs of sprucing the place up to make it more appealing to buyers, realtor fees, closing costs, property transfer taxes, and capital gains taxes. The timing of the market and the equity in the home are also considerable factors – the housing market may be too poor to make a profit, or the couple may be upside down on their mortgage.

Selling could disadvantage a stay-at-home parent with no paying job or a parent with significantly disparate income from a primary earner. Such parents likely won’t qualify for a loan and will have insufficient funds for renting. Uprooting children from their familiar schools, neighborhoods, and friends also requires more work.

Option 2: One spouse stays.

Advantages: One spouse could have a credit rating that is too poor for them to provide proper housing for themselves and their children. Stay-at-home parents or those with significantly disparate income levels may need the family home as a safe and dependable environment. In this instance, the staying spouse can forgo half of the equity in the house when splitting assets in the divorce. For example, if the property is worth $500,000, the staying spouse can give up $250,000 in assets (savings in joint accounts, property, etc.) or take on more debt to make up the difference for the leaving spouse.

Alternatively, the staying spouse can refinance the home and pay the moving spouse their half of the property value, buying the moving spouse out. In this way, the moving spouse gets cash and avoids selling costs.

Disadvantages: The staying spouse may not have the necessary credit score or capital to get approval for refinancing. The moving spouse must decide whether or not to accept less liquid assets to make up the difference. Keeping the house could financially strain the staying spouse if mortgage payments, utilities, and upkeep costs are beyond their means. Additionally, should the house be sold in the future, the staying spouse must pay all the selling costs and incur a greater tax liability.

Option 3: Co-ownership/ Bird-nesting

Advantages: In less attractive housing markets, staying in place can make the most financial sense. Parents have time to work on their credit scores, pay off more of the mortgage and increase the equity in the home. They stand to optimize future earnings from a sale while living (and keeping children) in a familiar home and avoiding moving costs for a time.

Disadvantages: On a future sale, tax exclusions drop from $500,000 to $250,000 when single and filing separately. This option takes more cooperation as parents will cross paths more often if they choose to share the home or trade out days living in the primary residence and possibly even sharing a rental. Also, having your name tied to a mortgage can negatively impact acquiring a second home.

Complicated Matters Made Easier

Divorce is a complicated, emotional process. Financially untangling and optimizing the funds a family has spent years building is even more challenging and not something anyone should do alone. Divorcing spouses should gather a knowledgeable team and use technology, like a divorced family app, to aid them in making the best decisions possible, keeping vital records, and amicably sharing information and court-ordered support.

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