One of the key elements of any divorce is the division of assets. Among the property to be divided, the marital home may be one of the most significant assets in the estate, not only in terms of monetary value, but also because parties often connect strong emotions to the marital home. To a divorcing party, selling the house may feel like they are losing yet another part of what defines them. A divorcing parent may also be concerned about uprooting their children; moving out of a certain school district; or moving away from family, friends, or their job.
The decision of whether to keep or sell your house during a divorce may be difficult to make and is grounded in both practical and emotional considerations. Despite these at times conflicting motivations, if you think about the pros and cons from the perspective of a financial expert, it may not make sense to keep the house in the end. Here are three reasons to reconsider keeping the house in a divorce, as viewed through the lens of an impartial divorce financial professional.
1. Houses Require an Outside Source of Cash Flow
On the marital balance sheet, $300,000 in home equity is often given equal weight to, say, $300,000 in a brokerage account. Yet, cash and investment accounts can be left alone to grow indefinitely, while houses require constant cash inflow to cover mortgage payments, real estate taxes, and upkeep costs. Moreover, houses are illiquid assets—you cannot pay the bills with home equity as you could with a liquid investment account.
Keeping the house in a divorce settlement also means you assume all the risks and expenses associated with the asset. For example, if you take the house and soon after the divorce is finalized the furnace breaks down, repairs or replacement could cost as much as $10,000. Do you have money in reserve to deal with these types of issues?
2. Spousal Maintenance May Not Cover Homeownership Costs
When considering keeping the marital home, the most important question to ask yourself is: Can you afford to pay all the costs of homeownership on your own? Houses are expensive assets, both because of monthly mortgage payments and other costs such as real estate taxes, property insurance, utilities, and maintenance costs.
If you depend on spousal maintenance to meet monthly financial obligations, it’s best to reconsider taking the marital home. Spousal maintenance is a risky cash flow stream, because your ex could:
- Lose their job and ask for a spousal maintenance modification
- Send payments that are untimely or less than the full amount
- Stop making payments altogether, requiring you to go back to court
Without consistent cash flow, you have limited means to pay for a home.
3. You Risk Overpaying for the House
Say the marital balance sheet lists the value of the house at $500,000 and you have a loan against it for $200,000. In this case, the equity in the house is $300,000. If you wish to keep the house, you must buy your spouse out for their half. However, if you sell the house a few years later, you may not recoup the money you now have in it. In this case, you have incurred all the expenses of owning and maintaining the home, in addition to likely paying the closing costs on the sale of the property, which are typically about 7% of the sales price.
If the home is allocated solely to you on the marital balance sheet, the courts typically won’t let you build-in the costs to get it ready to sell, closing costs, and realtor fees. This essentially means that you would overpay when buying out your spouse for the full $300,000 amount. Alternatively, if you and your spouse agree to sell the house and split the net proceeds, the closing costs and associated fees would be factored into the net equity value and split between the parties.
Helping You Get There…
Aside from the three reasons listed above, there are numerous other practical factors to consider when deciding whether to keep the house. These include:
- Do you need as large a house now that your spouse has moved out and your children may be off to college?
- What is the true fair market value of the house?
- Will the lender permit you to refinance the mortgage to your name only?
- Will you incur any capital gains on the future sale of the home?
Even after considering all the potential ramifications—recurring payments, unexpected costs, uncertain cash flow, etc.—you may still choose to keep the marital home. Just remember that, from a financial viewpoint, it often makes more sense to sell the home, split the net proceeds and start again somewhere new.
For guidance and support in your financial decisions as they relate to your divorce, it’s beneficial to consult a divorce financial professional. Contact Corey O’Connell, CPA/ABV, ASA at Boulay today at coconnell@boulaygroup.com or (952) 841-3025.