In many cases the marital home is the divorcing couple’s largest asset. It is also a highly emotional topic since it brings with it the children’s sense of “home”, the school district, a sense of normalcy, etc. The emotional attachment to the home is not unusual but it is essential that a person’s ability to afford the home on their own be calculated as part of the financial analysis. A client’s desire to maintain habits and perceived standard of living should not be reason enough to impoverish that person. If someone is unable to sustain the marital home on their own, they are better off discovering this before the agreement is signed, not months or years after.
There are some unique considerations with regards to the family home:
- If the home is close to paid off and has a large amount of equity, it is a “valuable” asset, but an illiquid one. A person cannot easily access the equity in the home for living expenses or income. There are some planning challenges that go along with this asset since “trading” an illiquid asset (house) for a liquid asset (stocks, brokerage accounts) can have unforeseen cash flow consequences.
- Regardless of what the divorce agreement says, until one party assumes the loan, refinances, or the home is paid off, both parties continue to be liable for the debt. This will continue to appear on a credit report and might affect a person’s ability to get another loan. The client seeking to keep the marital home should apply for a solo mortgage as soon as possible..
- Maintenance costs of the home are often underestimated. Lawn care, snow removal, heating oil, property taxes can add up quickly. Also repairs to a driveway, septic system, or roof can be a significant and often unexpected cost. A thorough analysis will help prevent future surprises.
- Any real estate, whether primary residence, vacation, or rental properties carries with it a cost basis and, therefore, as possible capital gain. Dividing assets based only on their current value can set clients up for unpleasant tax surprises when they go to sell the property.
If the property will be sold at a later date, the agreement should clearly stipulate who will pay the carrying expenses, whether that person will be reimbursed, and how the future proceeds will be divided. A way to protect both parties from market fluctuations is to specify each person’s share of the proceeds as a percentage, not a fixed dollar figure. This will allow for the costs paid to a realtor, attorney, etc. to be shared.
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