Should I Keep the House in the Divorce?
If you are struggling to decide whether or not to keep your home in a divorce, it is crucial to consider a few key factors.
When going through a divorce, who gets the marital home is often a big point of contention. Many individuals focus on their emotional connections to the home without considering the financial implications and whether it is in their best interests or even practical to keep the home. The current financial market and tax laws are important considerations in determining which assets you want to keep as part of your divorce, including the marital home. If you are struggling to decide whether you want to keep the home in the divorce, it is crucial to weigh the following:
- Whether you can afford to keep the home.
- What alternative housing options you have.
- Taxes and other cost considerations associated with a sale.
Can I afford to keep the marital home?
In Colorado, the Court is required to equitably divide property between spouses, meaning if you intend to keep the house, you must determine how you can pay out your spouse for their share of the equity in the home. The two most common ways for this to occur is through a buyout or a cash-out refinance.
A buyout occurs by allocating different assets to your spouse to account for the value of the home you are receiving. These other assets can be bank, investment, or retirement accounts, or from other assets that are unique to your portfolio, such as business interests. This allocation should consider the tax implications of the other assets to weigh whether the party is receiving an equitable buyout. For example, a 401(k) retirement account has different tax implications than cash in a bank account. If the current mortgage on the home is in joint names, you will still need to qualify to refinance the home to remove your spouse from the mortgage liability even if you are buying out your spouse with other assets.
A cash-out refinance uses the equity in the home to pay out your spouse for their share of the home equity. Whether or not a cash-out refinance is right for you depends on the current interest rates, whether you can qualify based on income, the amount of the new mortgage payment and the timeframe needed to obtain a refinance. As interest rates are now averaging above 6%, a cash-out refinance has become less appealing or impossible for many people.
Meeting with a mortgage broker to determine whether your income allows for you to qualify for a refinance is essential. If you intend to use spousal support as income to qualify, most lenders require proof of at least 6 months of payments. The amount of time needed to qualify for a refinance is an important factor, and meeting with a mortgage broker early on in the process will help you explore your options and make informed decisions in your divorce.
What alternative housing options do I have?
Remember that in a divorce situation, you may not always be able to afford the same type of housing that you could when you were married. You should be exploring alternative housing options at the earliest possible opportunity once a divorce is contemplated. Considerations like the affordability of rent, interest rates for new loans, and inventory in the real estate market need to be explored early on so that you do not enter into an agreement that does not meet your needs. If you have children, you need to be exploring housing options in the school district and ensuring that any replacement home meets their needs as well. Establishing realistic expectations early on will help you make better and more informed decisions along the way.
What should I be aware of if I want to sell the marital home?
It is important to consider the tax consequences of a sale and whether you wish to be solely responsible for these costs in the future or share them with your spouse now. In the current Colorado real estate market, people are seeing substantial increases in the value of their homes, which is creating capital gains taxes on the sale that people previously hadn’t considered as part of a divorce.
If you have owned and lived in your home for two of the last five years before a sale and own it jointly with your spouse, then up to $500,000 of profit may be exempt from federal income taxes. However, if you receive the home in the divorce and then later sell it, the profit exclusion for a single taxpayer is reduced to $250,000. This can have a serious impact on the net proceeds you receive when you sell the home. If you plan to sell regardless, it may be more advantageous to do so as part of the divorce so that you can receive a higher tax exemption on the house gain.
Besides capital gains, there are additional costs to consider on sale, including closing costs, realtor commissions, improvements, repairs, staging costs, and more. Remember that timing is also important, as there are other external factors that may impact the sale of your home including interest rates, time of year (what season), and available inventory.
If you are going through a divorce and need advice about your home consider speaking with a home appraiser, real estate agent, accountant, and mortgage broker to help you make this decision. Meeting with a divorce attorney can help you weigh your options and determine what is right for you and your family.
Kellian Coggswell is an Associate Attorney at Griffiths Law. Kellian’s practice is focused exclusively on family law related matters, including divorce, common law marriage, allocation of parental rights, post-decree disputes, and child support.
Eliza Steinberg is a Shareholder at Griffiths Law. Eliza’s practice is focused exclusively on family law related matters including divorce, allocation of parental rights, post-decree disputes, and child support matters.