If you have children, the spouse who has primary custody usually remains in the house with the children, unless you and your spouse can't afford it. If there are no children, you and your spouse can also work together to decide what to do with the house. The easiest solution is to sell the house and divide the proceeds. However, one of you may be more attached to the house than the other. In this case, you will, of course, need to have it appraised. You might each hire a real estate appraiser to value the house and then take the average of the two values. If you both trust and like the same person, you might decide to save money and hire one person.
Your current equity in your house is usually stated on your monthly mortgage bill. Or, you can calculate the equity by subtracting the mortgage from its assessed value. What's left, the equity, is what you will negotiate with your spouse if one of you decides to keep the house.
If you are considering selling the house, review the following considerations before placing your home on the market:
- Will your spouse or you be able to find comparable or sufficient housing at a lower monthly cost? Remember, mortgage payments are often tax-deductible, rent usually is not. You might be better off paying a higher monthly mortgage than a slightly lower rent. However, when insurance and taxes are figured in, renting might be cheaper.
- Are you selling at a loss because of the divorce? If you hold onto the house a year or two longer, will you fare better?
- Does the house require significant work? Will a renovation make it more marketable, and if so, do you have the funds to pay for the work? If not, you might decide to hold onto the house for now—even if you rent it to someone else—and sell it later.
- Will a move be so disruptive to the children that holding on to the house is important, even in the face of financial sacrifice?
- Consult a tax professional to help you determine what the best option is for you.
When You Keep the House
Suppose that you've decided to hold on to the house until your youngest child turns 19 and has been out on his own for a year. Assuming you and your spouse are working this out (rather than letting a judge decide for you), you can make whatever arrangements you both agree to, but here are some suggestions:
- The spouse who pays the mortgage from the time of the divorce until the house is sold should probably get a credit from the net sale proceeds (gross proceeds less outstanding mortgage, broker's fees, and so on) to the extent the principal of the mortgage was reduced while he or she lived there and paid the mortgage (with his or her own income or assets). But do adjust for any mortgage deduction for tax purposes. However, if the remaining spouse is paying the mortgage with support from the other spouse, it might be fairer to simply agree to divide the net proceeds with no credit to the remaining spouse for his or her mortgage payments.
- Credit any spouse who has paid for improvements to the house following divorce and prior to sale so that such cash outlays are recognized in division of the sale price.
- Consider agreeing that if the remaining spouse remarries or has a significant other move into the house, the sale provisions that were going to go into effect when the youngest child turned 19 (or 21, whatever you have agreed) will instead apply after the move-in or remarriage. For some, having a stranger move into “his” or “her” house is too much to bear.
- Decide now how you're going to handle the sale of the house when the time comes. How will you choose the list price and sale price?
- Now is the time to consider such strategies as dropping the price by a certain percentage if the house is not sold within a certain number of months from when it is first listed.
According to the Internal Revenue Service (Publication 936) “If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals.”
Even if the sale of the house seems far in the future, you might take the time now to devise a “first option,” which comes into play if the house, still jointly-owned, is put on the market and an acceptable offer made. In that instance, either spouse has the right to match the offer and buy out the other spouse, thus maintaining the house.
Finally, anyone who's bought or sold real estate understands that the tax issues can be substantial. If you plan to keep the house “in the family” after the split, you should consult a tax attorney or accountant about the ramifications of keeping your interest in the home and leaving your name on the deed, even though you yourself will be living elsewhere. The last thing you want to discover, 20 years down the road, is that you're liable for capital gains taxes you never dreamed of.
Speaking of capital gains (if any), now is the time to decide who will pay the tax on the profits from the sale of your house. Will you split the tax fifty-fifty? In the same proportion as the proceeds of the sale? Remember, you might get a larger share of the net proceeds if you made the mortgage payments. You might then have to bear a larger share of the taxes as well. Again, consult an accountant before finalizing the deal with your spouse.
When negotiating over the house, remember to give credit where credit is due. If the person who keeps the car has not paid the other spouse for half the value of the car at the time of the split, it's reasonable to post that sum as a credit against the car keeper's share of the house or deduct it from the cash assets.
Make sure to put everything in writing. Ask a lawyer how to make the agreement legally binding. (Do you need witnesses? Should your signatures be notarized? Find out now, or be sorry later.)