Aside from the emotional attachment one may have for their home, there are also financial attachments. The residence may be the 1st or 2nd largest asset acquired during your marriage. Below are some questions you may want to ask yourself when making decisions about what to do with the home.
What’s Your Timeline?
How long do you plan on staying in the home? Are your plans short-term, anywhere from one to five years? This may be the time span for someone looking to get a home ready for sale or if wanting to get a child through a few more years of schooling. Are your plans long-term with no desire to sell or to move to another location?
Your timeline is an important factor in making decisions about whether to keep the home or not. If you keep the home, the value used in dividing up assets may not be the value you sell it at. You take the risk of the market price being lower. You would also be the one to take care of the getting-ready-for-sale costs and the closing costs. If, however, your plans are more long term, market fluctuations can be controlled somewhat with the timing a future sale.
What Do You Have to Give Up?
The equity in the home is measured by subtracting the current loan balance(s) (secured by the home) from the current value of the home. If you want to keep the home’s equity, then you will be trading something else of similar value or borrowing from that equity to pay the other spouse their share. This may mean that you are keeping less retirement or another asset in order to keep the house. A house, as an investment, has cash flow needs. A retirement plan can remain unfunded and, if invested, may continue to grow in value without additional contributions. Are you going to be house rich but cash poor?
How Much of Your Cash Flow Goes Towards the Home?
Add up all the cash flow needs of a home including: mortgage payments, real estate taxes, insurance, upkeep, repairs, remodeling when house fashions change over time, etc. How much of your total cash resources will be needed to fund these expenses? Will you be working hard to keep the house but have little left over to enjoy or to save?
What are My Options?
Option #1 – Sell Now
Before selling, you should consider any tax consequences. Taxpayers are entitled to exclude up to $250,000 of gain on the sale of a principal residence, as long as certain requirements are met. Any prior business use of the home may create tax consequences. If you meet the ownership and residency rules, most commonly referred to as the “2-out-of-5 year rule”, in general, the taxable gain on a sale is:
Selling price minus the purchase price minus cost of improvements minus selling costs.
Option #2 – Purchasing a new home
Are you eligible to purchase another home? Do you have the required down payment and do you meet the more stringent debt-to-income ratios? If your sole source of income is support, how long do you need to collect the support before they will consider it as part of your qualifying income? The old days of easy credit are gone.
Option #3 – Delay the Sale
Perhaps you feel the home can’t be sold for the right price, within a reasonable period of time, or you want to keep the home until the youngest child graduates and, therefore, there is a delay in selling the home. There are options. You can continue to own the home jointly and only one person continue to live there.
Option #4 – Keep the Home
Keeping the home is another option. If you want to remain in the home for a long period of time, you will likely need to increase the amount you are putting towards your retirement savings to make up for what was given to your spouse. You must be able to afford the home and you should have a fluid cash flow to meet other expenses.
Tax laws are ever changing. Check with your tax advisor to discuss your specific circumstances. If I can be of assistance to you, please contact me today.
Susan A. Moussi, CPA, CFP®, CDFA SMD Tax & Divorce Financial Planning Consultants, Inc. Phone: 614.429.4172 firstname.lastname@example.org