Your house does not just provide shelter to your family. To many people, it represents your standing in the community. Just having a house is a big source of pride to people. It provides relatively more space, storage and privacy than renting an apartment. People have very strong emotional attachments to their homes. For many people, it’s very hard to consider leaving or selling the house.
Reasons to keep it:
- Comfort. You may have lived there for a long time. It represents your haven from the world.
- Investment. It took a long time to save the down payment. You know it will be difficult to get into another house. An apartment does not provide a return on an investment.
- Stability. Everything else is changing in your life. You need your home to stay the same. You need the neighborhood support.
- Proximity to schools and other important places. There may not be many other affordable housing situations available for your children to remain in the same school district.
- You’re too heavily leveraged. You purchased the house recently, or refinanced or added a home equity loan recently and would sell at a loss. Keeping it will permit you to build some additional equity.
Reasons to let it go:
- You can’t afford it. If your total housing cost, including mortgage, taxes, insurance, utilities and maintenance take more than 34% of your net monthly income, you may not be able to afford to pay for the house. Some people will stretch during the first year and pay up to 50% of the income for housing, provided the ratio is certain to come down after one or two years. It’s no fun to stay in the house, but not have money to do anything else during the month.
- Part of this analysis means going to your mortgage lender (or shop for a new one) and find out if there are ways to reduce your monthly payment. If interest rates have dropped, that can result in a reduction. Is your current loan being amortized at 30 years, or a lesser period. 20 and 15 year mortgages will increase the monthly payment. If you can refinance a shorter term mortgage for 30 years, you may be able to afford the house. Consider these options. Find out whether you qualify.
- Maintenance. Consider not just the cost of maintenance, but the actual doing of it. Does your week allow time to mow the grass, garden, shovel snow, and fix the many things that can go wrong? If you don’t have time, can you rely on others to help? If not, can you afford to pay someone to do it? If you have relied on your spouse to actually do much of the maintenance, you need to consider how you will pay to replace those services.
- Alternative housing makes more sense. If you are paying too much to keep the house or would have trouble maintaining it, consider downsizing. Perhaps an apartment isn’t the answer, but a smaller house or a condominium might serve your needs better at this time.
Ask a realtor to show you the market. You can even compensate the children for losing the old neighborhood by moving closer to their schools or closer to their friends. The advantage of a condo or apartment is that much of the maintenance is done for you. They often come with amenities, such as pools and a club house.
- If your share of the marital estate is made up mostly of the house, leaving you with little or no liquidity. Houses have been defined as 24 hour per day hobbies or money pits. Often very expensive things go wrong. You need some liquidity to help you pay for emergencies (the car breaks down, job loss, illness) and for the house (new roof, broken water heater, furnace). If you leave the marriage with almost all of your marital property wrapped up in the house, you may not have any money to meet these emergencies. You are taking a huge risk. You may be forced to sell the house to pay for the emergencies and take less.
- Hidden costs. These days, people prefer to buy homes on large, country lots. If you are one of these, consider the cost of transporting the children and you back and forth to school, work, activities, grocery shopping, etc. Factor this into the cost of keeping the home. A smaller home in town may cost less in many ways.
- Falling value. Most residential real estate has lost at least 20-30% of its value. We may not have hit bottom, yet. You may be accepting a declining asset.
- You may not be eligible to refinance. Due to reduced property values, many home owners have lost the equity in their homes, making it difficult to refinance the home and remove your spouse from the mortgage. You may need to sell to terminate your spouse’s obligation, if he or she will not agree to stay on the mortgage.
- Emotional costs.
- Some people report it is painful to continue living in the marital home since it serves as a constant reminder of what they have lost.
- If both spouses want the marital home, the one who gets it is the “winner” and the one who doesn’t is the “loser.” If you both feel very strongly about having the house, selling it can defuse what can become a long-term power struggle.
If you are still interested in keeping the house after doing this analysis, consider the cost to you if after six months or a year, you can’t afford to keep it. The first step is knowing the fair market value. If there is a chance one of you will keep the house, hire a licensed appraiser to tell you the fair market value. Then find out the current balance on the mortgage and any home equity loans.
A. Courts generally compute “equity,” in two ways.
If one spouse keeps the house: equity is the fair market value (what someone would pay to buy the house) less the amount owed (mortgage, home equity loan, unpaid taxes).
If the house is sold to a third party: equity is the fair market value less the amount owed, less real estate commission, costs of sale and transfer taxes.
Equity is less if the house is sold. Courts will often not discount for costs of sale if a sale is not imminent, because the costs are too speculative. (Meaning some people sell without a realtor or sell so far down the road, that the costs become meaningless.) If the house is sold as part of the divorce, you and your spouse split the costs.
If you sell it yourself after the divorce, you pay all the costs. If you have to sell relatively soon after the divorce, what you actually collect from the house will be much lower than you had expected to take. This is a bad deal for you.
B. Capital gains tax may require a sale as part of the divorce, or at least an adjustment on your marital estate.
Under the tax law in effect after the 1996 tax reform act, you pay no capital gains tax if you make $250,000 or less profit on the sale of your house. Talk with your tax advisor about how “profit” is computed. This is not the same as “equity.” In general, it means, fair market value, less major improvements you have made, less the price you paid, less costs of sale. If you live in a house that has appreciated more than $250,000 while you owned it, you will have to pay capital gains tax (generally 20%) on the amount over $250,000.
If you and your spouse join in the sale, you can each apply your $250,000 credit and shelter up to $500,000 in profit.
You must have lived in the house for the last 2 out of 5 years.
Since the laws are technical, it’s best to check with your tax advisor if there is a chance that the house will bring a large profit. If you have bought and sold other houses under the old tax law, talk with your tax advisor about those sales.
If you are awarded the house, with a large profit in the divorce, even if you have the money to pay for it, you need to consider the potential tax on the sale in order to get what you had bargained for. In other words, if you will pay an additional $20,000 in capital gains tax if you were to sell the house now, you might want to deduct that amount from the equity that you are receiving in the marital estate.
The decision to keep or sell the marital home is very complicated. Use the services of your attorney, a realtor, banker and accountant to make an informed decision that will feel right in the years that come.
Should I keep the house?
Monika Holzer Sacks
Nichols, Sacks, Slank, Sendelbach & Buiteweg, P.C.