If you bought your house while you were married, your gut reaction in a divorce is likely to fight to keep it. However, while a house is a substantial asset, it can also create unnecessary hassle during an emotionally fraught time.
Here, we’ve gathered 10 instances when a divorce house sale is a smart decision.
1. You can’t afford the mortgage on your own.
If both spouses’ names are on the mortgage, whoever wants to keep the house will have to refinance it solely in that person’s name, said Allison Rank, a top performing real estate agent in the metropolitan Kansas City, Missouri, area, who works with divorcing clients.
One spouse can relinquish their interest in a property to another through a quitclaim deed, but that doesn’t absolve the person of financial responsibility on a mortgage.
“A lot of people can’t afford to carry it by themselves, or get a loan with just their income,” she said.
“If you bought your home for $300,000 and now it’s worth $600,000, you don’t have access to that $300,000 in equity you’ve built up to help with the refinancing. Your spouse has claim on half of that equity,” he said.
Essentially, you’re refinancing for the existing loan amount plus half of the existing equity, so you’ll need to qualify for a larger loan amount on your income alone.
Even if you’re able to afford your house payment after you refinance, you might not be able to afford the real estate taxes and insurance by yourself.
If the house payment, real estate taxes and insurance equal more than one-third of your income, you’ll likely be “house poor,” notes Karen Covy, a Chicago-area divorce attorney with over 25 years of experience, on her website.
Some people think that child support or spousal support will help cover those payments, but it’s best to be sure that you can handle them without that in case, for whatever reason, your ex can’t pay what’s due.
2. You can’t afford to buy out your spouse’s share of equity.
Your house’s equity is a marital asset, so your ex is entitled to a portion of this value, according to LegalZoom.com. How much is determined by whether you live in one of nine community property states—Arizona, Nevada, California, New Mexico, Washington, Wisconsin, Idaho, Texas, and Louisiana—or one with an equitable distribution system. (MaritalLaws.com, an online resource for divorce, property division, alimony, custody, child support, and visitation laws, provides the divorce laws of each state with an easy, interactive map and all the fine print in one place.)
In a nutshell, courts in community property states treat all assets as if both spouses own them equally and divides equity 50-50. In equitable distribution states, the court takes into account factors such as each spouse’s current earnings, needs, contribution to the acquisition, and so on, dividing equity so that one spouse has a higher percentage than the other.
To ensure that your ex gets the portion of equity entitled by law, you’ll either have to refinance enough to cover that amount, or offset your ex’s portion by giving up your claim on other marital assets of equal value. This might mean reducing your portion of a retirement account or negotiating less alimony. Can you financially handle those concessions?
3. Tax law isn’t in your favor.
Changes in the tax code have affected the deduction for alimony and the benefits of homeownership. For starters, the 2018 Tax Cuts and Jobs Act states that alimony payments won’t be deductible, resulting in a larger tax bite for the recipient.
Married taxpayers used to be able to deduct interest on a mortgage of up to $1 million, but as of the 2018 tax year, only interest on mortgage values of up to $750,000 are deductible, notes U.S. News World Report.
Although there is a grandfathered deduction for mortgages taken out before December 14, 2017, removing one spouse from the mortgage could result in refinancing, which means the mortgage could be subject to the new tax law.
You also want to think about how holding on to the house for any period of time could impact your eligibility for the capital gains tax exclusion. The government allows married couples to exclude up to $500,000 of capital gains on their home sale while single filers can exclude up to $250,000. If you sell your house after getting divorced or remain married but change living situations, you could inadvertently increase your tax liability without proper planning.
Talk to a tax professional for further guidance.
4. You can’t handle the upkeep.
There are instances where a divorced couple can continue to co-own a home, but a workable solution is easier to reach in theory than in practice, says the law firm Ayo and Iken, which has served western, central and southeastern Florida for 14 years.
Let’s say you agree that you’ll stay in the marital home until all minor children have graduated from high school; then you and your ex will sell the house and divide the proceeds.
Trouble is, your ex spends the next five years complaining about how well you’re trimming the shrubs, the color of the exterior, and so on.
“You are likely to find this invasive, while your ex may feel [that] since the house is still technically half theirs, they have every right to dictate what you do or don’t do to the house,” the law firm notes on its website.
5. You don’t know what the market will bear.
Real estate is generally an appreciating asset that increases in value at a rate of 3%-5% per year. But the market does ebb and flow in cycles and if you’re seeing any of these 5 signs of a downturn, you’d be better off making an exit strategy and cashing out.
Also don’t forget that you should expect to budget 1%-3% of your home’s value for the cost of maintenance and repairs depending on your home’s age and condition.
6. You don’t want to be responsible for all repairs, closing costs, and related risks.
If you sell the house prior to your divorce, that’s on you as a couple, Rank said. You pay all closing costs and expenses together.
Once you’re divorced, your ex isn’t on the hook for anything related to the house sale, unless it’s specified in the divorce decree.
If you and your ex don’t retain joint ownership of the house, then whoever is on the mortgage also assumes other risks associated with selling later, such as “structural risks” of undiscovered problems like cracks in the foundation, radon, or mold, adds Divorce Magazine.
7. You’re upside-down in the mortgage.
If your house is worth less than you owe on it, your divorce becomes more complicated, said Emily Doskow, author of Nolo’s Essential Guide to Divorce and writer on Divorce Net by Nolo, one of the leading websites for legal matters. One option is to negotiate a change in the terms of your mortgage, which is trickier if your house has a second mortgage or a home equity line of credit.
If you have only one loan on the property, you could sell your house in a short sale, which is where a buyer pays less than the amount on the mortgage but the bank agrees not to pursue you for the difference, avoiding a foreclosure on your record.
8. You don’t need all that space.
Particularly if you’re older, you may want to start fresh in a smaller place. A recent Merrill Lynch survey of retirees over age 50 found that 51% of those who have moved since retiring opted for a smaller home.
A house that was suitable for raising a family or for two adults may have too much square footage, not to mention memories, for one person. A smaller abode lightens your amount of housework and yard work, reduces your monthly expenses, and clears out clutter.
9. You need the money.
Divorce attorneys say that if you have a fixed rate mortgage with a low monthly mortgage payment and relatively low property taxes, it might make good financial sense to keep your marital home.
That said, you and your ex may have considerable debts to resolve where your home’s equity could prove valuable. Divorce itself is an expense. Unless you have a simple uncontested divorce where you can use an online service for about $250 to $500, you could pay about $5,000 on average for mediation, or $15,000 and up for a contested divorce.
10. You want a clean slate.
Dividing property is “one of the greatest burdens of the divorce process,” because of the legal as well as psychological value, notes the American Psychological Association. Even without the context of a divorce, for many people, a house is not just a place to live but “an extension of my physical body and my sense of self,” said Dr. Karen Lollar, writing in the peer-reviewed academic journal Qualitative Inquiry.
You may be able to afford to keep your marital home, but once you’re divorced, will you truly be happy there? “Will there be bad memories for you?” asks the law firm Ayo and Iken. “Will you ever feel that this is truly your home rather than the home of you and your ex?”
You may not be holding on to the house out of anger, but staying in your house could hold you back in this new phase of your life.
As you consult with financial and lifestyle professionals like a real estate agent with divorce experience, an accountant, and financial adviser, also think hard and seek help about what you’ll need to move forward emotionally.