The marital residence causes the most immediate and often enduring arguments during divorce. Both parties have attachment to the marital home – emotional, financial and practical. But in the end the marital home is an asset with either a positive or negative equity value. Both spouses should have an interest in preserving the equity value of the house – and should use that position to their advantage.
First, the parties must decide whether one party will keep the house or they will sell the house. A court tends to favor keeping the children in the marital home for continuity, but that not might be the wishes of the parties themselves. It may or may not make sense financially. It is important to consider all financial and non-financial factors prior to agreeing what to do with the home (keep or sell) and who will occupy if kept.
Second, if the house will be kept, the parties will need a solid appraisal and the party who will keep the house needs to determine whether he or she can refinance the mortgage in his or her own name. The advantage to the party who does not keep the house is having the maximum equity value assessed so that he or she receives his or her share of that equity. For the party keeping the house, it is critical to determine in advance if keeping the house is financially feasible, including not only the cost of the mortgage, but also maintenance and upkeep. For the party not keeping the house, it might make sense to help keep the other party in the house in exchange for something else of value in the overall property settlement.
Third, if the house will be sold, the parties need to consider how to handle the sale, how to present the house (repairs, upgrades) to maximize its resale price, and who will be responsible for these tasks. Also, the sale of the house will result in a capital gain (in most cases) which could present major tax problems for both parties. If the proceeds of the sale are rolled into one or two new households, the parties can avoid taxes, so these issues should be researched. Finally, the parties must agree on who will pay closing costs, the realtor fees and other associated costs.
Finally, if the house is actually under water (at a loss or negative equity), keeping the house may make sense to wait out the market if the parties can arrange to afford doing so as separate households. If the house cannot be kept, apportioning the equity loss is an important consideration, as it impacts the taxes each party would owe in that fiscal year, and it may be more beneficial to one party to bear more of the loss.
As you can see, determining what happens to the marital residence has many financial aspects that should be addressed prior to divorce. If done right, both parties will benefit, even if one or both no longer live in the house.
If you have questions about real estate and divorce, contact us – we can help.