It is common that throughout the divorce process someone will decide that they want to keep the family home. As a mother you may find that your inherent need to be the caregiver has shot you into fight mode to maintain some form of normalcy for your children. You may find yourself holding tight to the home you believe can provide that stability you know your children (and you) desperately need during this time. While it can be tempting to want to lean on something familiar you need to be cautious that it may also be the costliest mistake you could make. I know it sounds cliché, but a house is just a house, and over time your home will become wherever you are. The family home can hold a lot of emotion, good and bad. So first try to look at the house as just another asset to be divided.
There are a handful of factors that are at play when deciding what happens to the family house. In some cases, the financial affects may not be felt until years down the road, but can be costly, nonetheless.
Oftentimes the house is the largest asset in the divorce settlement. If you decide to keep the house, you may find your financial freedom locked up in the equity of that building. Let’s assume you have been in your house for a while and the market value is $400,000 with $300,000 in equity. As marital property you are entitled to half of that equity. So, if you were to keep that house, then the full $300,000 of your divorce settlement would be tied up in the property. If you were to take that same $300,000 and conservatively invest it, you could generate over $12,000 a year in income. And don’t forget about the costs of upkeep, maintenance, and for places like Texas, the high property tax. These items will require you to increase the amount of income needed just to make ends meet.
The factor that can come back at you down the road is taxes. If you were to sell the house while you were still married the $300,000 gain would fall under the marriage exclusion of $500,000 and be tax-free. However, if you were to sell the house after it has been transferred into your own name that gain is no longer fully covered under the reduced exemption of $250,000 for a single individual. Now you are looking at a gain of $50,000 that would cost at least $7,500 in capital gains taxes and even more if you’re a high wage earner.
Divorce is hard but it also can open the door to a new beginning, a new you. Starting on the right financial footing is essential to your future. To be certain that you understand all the ramifications of the property settlement you are considering, bring a Certified Divorce Financial Analyst® (CDFA®) into your team to guide you through some of these issues. You only have one chance to get your settlement right. Take the time to gather information and make sure you are doing the right thing. It will be the best decision you ever made.