When going through a divorce, the marital residence is usually the greatest source of uncertainty and conflict during the negotiations. Often the most valuable asset for divorcing couples financially and it also represents family, hope, and security.
The marital home will play a big role in your overall settlement agreement. There are several ways it could be handled in the division of the marital estate depending on your circumstances. It is important to find a solution that is not only emotionally satisfactory but also considers the value of the home and the rest of the couple’s assets.
• Selling the home. One of the most common options is selling the home and splitting the equity if any. Generally, the sale of the primary residence is not taxable (subject to certain requirements). The Internal Revenue Code also provides for special rules related to the ownership and use period when the sale is related to a divorce.
• One spouse keeps the home. Another option is for one of the spouses to keep the home. In this case, the party keeping the residence, assumes all liability including refinancing the mortgage, tax liability, maintenance costs, and any unexpected expenses. In this instance, the parties should hire a certified appraiser to value the home. It is also important to identify how the spouse keeping the home will pay the other spouse for their share. In this scenario, the parties may run into some obstacles if there are not enough assets to balance the settlement, and/or refinancing limitations depending on the financial outcome of the spouse keeping the home. For instance, Fannie Mae has a specific set of financial requirements for parties going through a divorce and these are not negotiable.
• One spouse keeps the home and both spouses share liability. A third option is for one party to keep the home with both parties sharing the liability (often, this is an option when the kids are young, or one party cannot afford to refinance at the time of the division). Generally, the parties could agree to sell the home years later and share equally or unequally any equity, commissions, closing costs and tax liability if any. This option requires both parties to stipulate who will make the payments, and how will the expenses related to the home be paid, etc. The Agreement between the parties should have clear and specific language to avoid disagreements in the future.
• Keeping the home as a rental. Finally, the parties may decide to keep the home as a rental property. This would require some additional steps to protect each parties’ interest in the property. For example, the couple should change the way the property is titled and run the property as a business. In this scenario, the parties would share the expenses and income, as well as the tax liability due to capital gains. If the parties decide to sell the home at a later time, they may not be entitled to the exemption for capital gains tax.
These are just some creative ways to divide the marital home and ensure both parties receive an equitable portion of the asset. Each solution comes with its own set of advantages and potential disadvantages for both parties. When deciding how to handle the marital home during a divorce, it is important to consider your own circumstances, tax issues, financial viability for keeping the home and the financial consequences depending on your specific options.
María Iglesias Martínez, CDFA® CDS™
Divorce Financial Planner
I am a Certified Divorce Financial Analyst®, Certified Divorce Specialist™ and the founder at Ever After Wealth™. Learn more about my mission at www.everafterwealth.com or email me directly at maria@everafterwealth.com.
Disclaimer-- To avoid any conflict of interest, I do not manage assets nor provide investment advice. I do not sell financial products. I work strictly as a consultant.
