It may be the asset most sought during divorce – the marital residence. For some, it may be the most significant marital asset. For others, it represents a range of emotions and memories, from raising the children to happier times. For still others, it comes down to simple inertia – I am here and I do not want to move.
But keeping the marital home involves more than sentiment or waiting out your estranged spouse. It becomes a question of math: as a marital asset, each spouse has an equal claim to the equity in the home. Hence, if one spouse wants the house, that spouse has to pay the other spouse his or her equity share and also refinance the mortgage.
This simple math leads to several key questions when deciding whether keeping the marital home makes sense.
First, can you afford it? Do you have some other way to pay the other spouse for that spouse’s equity share? Or are you willing to give up another valuable asset for it? Usually, spouses will trade retirement funds or cash for the equity share – generally a terrible trade because you can always make more investing the cash or retirement fund over time than you can in the real estate market. Also, can you refinance the mortgage and make the payments? What about upkeep and maintenance on the home? Before making a decision, find out the real cost to you to keep the house.
Second, it is not just the sale price of the house. When you take the house, you take its tax consequences. In the short run those can be good – interest deduction on the mortgage (though that will be lessened by the new tax law). But if you plan on holding the house until the children graduate and then downsizing, you will lose part of your equity to taxes – specifically, capital gains. While the new tax law reduced the capital gains rate, it still means losing one-fourth of the equity in your house to Uncle Sam. If you sell the house as part of the divorce, you can at least split the capital gains tax.
Finally, when you assume a mortgage, you create a permanent monthly expense that can crowd out other items in your budget you may like to purchase or more importantly save. If you spend too much of your monthly income on the house, you lessen your ability to save for the future and risk having to sacrifice retirement income for a few more years in a house. You should ask yourself, is it really worth it?
As you can see, keeping the marital home is not always a good financial idea for many spouses, and you should know the true opportunity cost of keeping the house before fighting for it in the divorce.
If you have questions about the marital home and divorce, contact us – we can help.