Many divorce clients in San Diego struggle with the decision of whether to keep their home during a divorce. With all the life changes inherently involved in a marital dissolution, many people prefer to hold on to the family home because it is a source of comfort. This is especially so when there are children involved and parents do not want to further disturb the norm. Staying in the home will allow children to stay in their current schools and continue their existing relationships with friends and neighbors in the community. While this may be the decision that seems right emotionally, there are several considerations to determine whether this decision is financially sound.
1) Can I Afford the Home?
The first question to ask is whether the home fits into your budget. When you are married, the family income works to support one household. Upon divorce, that same income needs to be stretched to support two separate households. Therefore, unfortunately, oftentimes concessions will need to be made. Sometimes that concession involves downsizing your home.
Prior to making the decision whether to keep the home, you will first need to have an idea of your child and spousal support rights and obligations. The higher-earning spouse may believe he or she can afford the home, only to find that this is not true once they are required to pay child or spousal support. Similarly, the lower-earner may in fact be able to maintain the mortgage once they receive support.
2) How Long Would I Stay in the Home?
Another consideration is whether you want to be in the home long-term. Staying in the home short-term may not make sense if it means that you will be solely responsible for the costs of sale. Instead, it may be a better idea to share the costs of sale with your spouse while the divorce is pending. For example, if your children are teenagers and you plan to sell in a year or two after they are out of the home, it may not be worthwhile to keep the home given the financial costs of sale. You should also consider whether there will be capital gains taxes. You may be able to avoid these taxes if you each can use the $250,000 exemption, but can lose this ability under certain circumstances when one party takes the home.
3) How is the Mortgage Held?
If you stay in the home, your spouse is likely going to require you to eventually remove his or her name from the mortgage. Therefore, I suggest speaking with your lender to determine whether you will qualify for a refinance prior to making the decision to keep the home. Oftentimes, in a divorce agreement, the parties will agree to a set period of time to remove the other spouse’s name from the loan following the divorce (frequently six months to one year) and requiring that the home be listed for sale if that is not possible. You do not want to be in a situation where you are solely responsible for the costs of sale after being in the house for only a year or so, only because you cannot refinance the home.
4) Is it Beneficial Given My Circumstances to Instead Have Liquid Assets?
Since California is a community property state, you and your spouse will equally divide all assets and debts acquired during the marriage. Therefore, it’s necessary to determine whether there is equity in the home and what keeping the home will cost you in the asset division. To do this, you first need to determine what the house is worth. Oftentimes, I will simply place a call to a local realtor and ask for an informal estimate. If both parties agree to this value, no further investigation is needed. If not, the parties can choose a neutral real estate appraiser to provide a formal appraisal of the home.
Let’s say this shows that there is $100,000 equity in the home and the other primary marital assets include a savings account holding $50,000 and an investment account with a current value of $50,000. If you decide to take the home, you would need to trade it for the entire savings account and the entire investment account. At this point, I would suggest speaking with a financial advisor to assist you in determining which is a better strategy.
After you have answered these questions, you can make the decision whether to keep the home or list it for sale. If you list the home for sale while the divorce is pending, you will need to have a detailed agreement in place outlining the terms of the listing, sale, payment of costs, and division of the proceeds. Ultimately, each family’s situation is different and the decision must be made on a case-by-case basis given the emotional and financial considerations involved.
-Tess Reutzel, Esq.
The information in this article is for general information purposes only. Nothing in this article should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.