Divorce is never a happy circumstance, and the financial necessity of selling your home as a result can compound the emotional stress.
Even if you're inclined to keep your house post-divorce, selling is oftentimes the best solution, even if it means taking a loss. The choice to sell is much more common today than it was in the past. Unfortunately, once you've made the decision to sell, all your questions haven't been answered. Here's a list of factors to consider once you've decided to sell your home, post- divorce.
Proceeds. One of your first questions should be how much money will the sale net, who will get what share of the total and what will the tax implications be? We advise spouses to run the numbers before they put their home on the market.
If your mortgage debt is more than value of your house, you'll also need to think about how you'll afford another place to live and whether your lender might try to collect the deficiency on your loan, a prospect that's allowed in some, though, not all, states.
Timing. Another question is whether to sell your house immediately or sometime further off in the future. Factors to consider include your children's ages and local housing market conditions. If you have school-aged children or home prices in your area still haven't begun to recover, it might pay to delay the sale.
Occupancy and decision making. The next issue is whether you or your spouse will continue to live in the house until the sale closes, and how much decision-making authority each of you will have during the sale. If the Realtor says you need to have repairs made before the home is marketable, it can be a difficult to agree on how the tasks will be completed. Be as clear as possible with your spouse about what decisions you will make together and/or separately.
Trouble selling. You'll also need to plan for what will happen if your house doesn't attract a buyer. Consider what the back-up plan will be if the house doesn't sell within a certain timeframe. The parties may be willing to decrease the price, or meet with a Realtor and re-evaluate why the house isn't selling. This might seem like grounds for a major disagreement, but most divorcing couples want to move on with their lives, not squabble about the sale of their home. The house is often their largest asset. And a sense of closure occurs once the decision has been made. Whether they divide it, sell it or offset it (with other assets), it's a big piece of the puzzle.
Cooperation. Finally, you and your divorcing spouse probably have different priorities. Still, cooperation is the most crucial aspect whether you're trying to decide on a sales price or who will live in the home until it sells. You'll want a clause that says both parties will be reasonable and not withhold permission in order to negate the sale so one party won't purposely be difficult.
Taxes. While we would never recommend a decision be based solely on taxes, you should be aware of the consequences if one spouse moves out and the other remains in the jointly-owned house for a period of time. If the house is sold and the proceeds divided, the tax law provides that the tax-free rollover of the gain on sale and the one-time exclusion election are available only to the taxpayer who sold a principal residence.
The spouse who moved out does not qualify as a principal resident if the house is sold more than two years after the spouse has left. This spouse must then recognize the entire gain attributable to their one-half interest in the house. The spouse who moves out should be informed that he or she will be liable for his share of the future gain on sale should this problem not be addressed in the divorce or separation agreements. Consider adding a clause to the divorce settlement that provides that each spouse bears an equal burden of any taxes paid on the gain.
About the Author:
If you would like to learn about the role of a Certified Divorce Financial Analyst (CDFA) or a Collaboratively Trained Financial Professional, we would welcome the opportunity to talk with you further at 603.458.2776 or by emailing Kristina here. Kristina George CPA, CFP® at Northstar Financial Planning, Inc., Windham, NH. Fee-only Financial Life Transition Planning and Wealth Management. www.northstarfp.com