How to handle the family home post-divorce

Dear Gabby,
My clients are going through a divorce, and they are asking me about how to handle the marital home. Do they have to sell it? They have a child in high school, and they’d like to keep the house until they graduate but are not sure if they can afford it.
Terry F.

Atlanta, Georgia 

Dear Terry,
The family home is often the most valuable asset in a marriage, and how to handle it in divorce is a common and tricky question. Divorcing couples have many options to consider when dividing their home. As their financial advisor, you can help them understand their choices and make appropriate decisions based on their comprehensive short-term cash flow and long-term financial goals such as retirement planning and college funding.

To begin, you must first inquire whether either party actually wants to continue living in the house. During a divorce, some people choose to downsize in an effort to reduce their living expenses and overhead or avoid the memories of their marriage, and buy a new house to gain a fresh start on their next chapter. If neither spouse wants to keep the home, then the division process can be simple, quick, and easy.

To help you advise your clients, please consider the following options:
Buy-out: one spouse buys out the other spouse’s share: One spouse can buy out the equity interest of the other and transfer the deed pursuant to divorce. The transfer from one spouse to the other is a non-taxable event and results in one spouse having sole ownership of the home, including being responsible for all mortgage payments, real estate taxes, homeowners insurance, and maintenance. Property valuation is critical in this option since the amount of the buy-out is calculated by determining the equity. This process requires a formal real estate appraisal conducted by a professional specifically trained in divorce cases. Don’t rely on a valuation from a real estate agent or online real estate websites – they can be misleading and inaccurate.

Selling the house and splitting the proceeds: If one of your clients expects to sell the marital home within 24 months, it is best to sell it jointly now. If they take this option, they will share the expenses related to the preparation and sale of the home such as staging, repairs, touch-ups, real estate commissions, transfer taxes, etc. Once the mortgage and all expenses are paid, they can split the proceeds. Also, if they meet the requirements, they will enjoy the benefits of the capital gain exclusion, which is twice the amount for a single owner. This option is a great way to extricate the parties economically and financially disentangle them from each other in the future.

Co-owning the house and selling it post-divorce: This option can be tricky. Owning a valuable asset with an ex-spouse can be complicated because it requires a high level of co-operation and joint financial management. The ex-spouses must agree on maintenance expenses, especially if one spouse is living in the home. Determining who pays for what and agreeing on the cost, service providers, and timing of repairs and upkeep can be difficult between ex-spouses. The couple could treat the person who is living in the house as a “renter” who pays all utilities and split the mortgage, taxes, and insurance.  In addition, calculating present equity versus future value if only one spouse is paying the expenses can be complicated and create conflict. Further, depending on how long the co-ownership lasts could impact the capital gain exclusion benefit upon sale of the property.

As you can see, there are a lot of decisions to make around how to treat the family home that involve post-divorce cash flow, family lifestyle, and child-related factors.  I recommend that you consult with the couple’s attorneys and provide neutral financial projections that consider each option in an independent scenario.

Gabrielle Clemens is an expert on divorce financial planning and a certified divorce financial analyst. She is also the author of Marriage Is about Love, Divorce Is about Money®.