What Is Better Financially in a Divorce — Keeping the House or Dividing the Assets?
Couples making strides toward divorce may come to a crossroads where it’s difficult to decide whether to keep the house or sell it and divide the assets. What’s best for each party financially depends on a variety of factors.
To help, here are the pros and cons of keeping the house or selling it and dividing the assets, as well as a couple of alternative options, according to a family law attorney.
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Pros of Keeping the House
Nina Shayan Depatie, founding attorney at Shayan Family Law, APC, a family law firm based out of Los Angeles that routinely handles divorce cases, said that the two main pros of keeping a house in divorce are promoting stability for the children and preserving a valuable asset.
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Promoting Stability for the Children
Shayan said that most parents want to minimize the impact that divorce will have on their children. She explained that keeping them in place, in the house where they grew up, is a good way to maintain a sense of normalcy and minimize disruption.
“This allows the children to stay in familiar surroundings, in the same school district, etc.,” Shayan said. “In fact, more divorcing couples now take turns living in the family home for a period after divorce, so that the children can stay put when parents alternate custody. This strategy, known as ‘nesting’, has been accelerating over the last few years.”
Preserving a Valuable Asset
Shayan explained that when you sell a home, any gains exceeding $500,000 are typically taxable.
“Keeping the house can avoid eroding equity at the expense of Uncle Sam,” she said. “As we come off a historically low rate environment, it is difficult for homeowners to part with their ultra-low rate mortgages. Accounting principles notwithstanding, a mortgage with 25 [plus] years remaining at sub-3% rates often feels more like an asset than a liability.”
Cons of Keeping the House
Shayan said main cons of keeping a house revolve around mortgage liability, possible refinancing and remaining jointly liable on the mortgage.
Mortgage Liability
“First, in most instances, both spouses are liable on the family home’s mortgage,” said Shayan. “When one spouse seeks to keep the house, the divorcing couple will need to work with their lender to allow that spouse to assume the entirety of the mortgage or to refinance the existing mortgage.”
Shayan said that removing one spouse from the mortgage can be difficult because it “materially alters” the credit profile and may not be acceptable to the lender.
“This is especially true in instances where the lower-earning spouse seeks to keep the home,” she said.
Possible Refinancing
Shayan said that refinancing in today’s rate environment may also be challenging.
“First, rates have increased significantly over the last few years, so a new mortgage would materially increase borrowing costs,” she explained. “Second, while two spouses may have been able to qualify for a mortgage based on their joint income, not all spouses may be able to qualify for an equivalent mortgage based on their income alone.”
Remaining Jointly Liable for the Mortgage
Shayan said that if one spouse can’t assume the entire mortgage or refinance it, the spouse that doesn’t stay in the house may remain jointly liable on the mortgage.
“Although divorce settlements can provide for indemnification obligations if the in-house spouse falls behind on the mortgage, indemnification clauses don’t alter the primary liability that both spouses have vis-à-vis their lender,” she explained. “Understandably, many clients are uncomfortable with lingering liability and their personal exposure being in their ex’s hands.”
Pros of Selling the House
Shayan said that the two main advantages of selling the house are a simpler asset division process and a cleaner break.
Asset Division Process
“One of the main challenges in asset division matters is determining the value of the community assets,” said Shayan. “Divorcing spouses may have differing opinions on the value of the family home, and spouses [may have] contributed separate property towards its purchase or improvement.”
She explained that by selling the home, the market dictates its value, and secondary issues, such as the reimbursement of separate property contributions, can be settled in cash at the closing.
Achieving a Clean Break
“This ability to settle out reimbursement issues and to monetize a community asset typically allows clients a cleaner break,” explained Shayan. “Assuming the property isn’t underwater, sales cut off mortgage liability, and the proceeds can give both spouses a financial cushion from which to build back their own, separate lives.”
Cons of Selling the House
Here are the disadvantages of selling the house in a divorce.
Difficulties for Any Children Involved
“First, selling the house will invariably uproot the children,” Shayan said. “Many parents are concerned about the destabilizing effect that moving can have on children, especially if it results in their moving to a new school district and needing to make new friends.”
Possibility of a High Tax Bill
Shayan said if there is a substantial gain from the sale of the home, the divorcing couple may be hit with a substantial tax bill.
Challenges If the Mortgage Is Underwater
“If the mortgage is underwater,” Shayan explained, “the parties will need to find other sources of funds to make the lender whole or will need to convince the lender to accept a short sale.”
Other Options
Here are a couple of other options, if neither keeping the house nor dividing the assets is feasible for your situation.
Take Turns Living In the House
“Short of selling the home or one person keeping it, some couples may take turns living in the house during their own custody period,” said Shayan. “This is the ‘nesting’ approach.”
Rent Out the House
“Alternatively, couples can also decide to rent out the house,” Shayan said. “This strategy can help preserve a valuable asset, create cash flow, maintain a historically-low mortgage rate, and avoid disrupting children’s lives and incurring a substantial tax bill.”
However, Shayan explained that renting out the house will turn divorcing parties into co-landlords while maintaining their status as co-borrowers, which may not be an ideal situation.
“While some former spouses can work together post-divorce, others will want a cleaner break,” she said. “Staying jointly liable for a sizeable loan and sharing landlord responsibilities isn’t conducive to a clean break.”
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This article originally appeared on GOBankingRates.com: What Is Better Financially in a Divorce — Keeping the House or Dividing the Assets?
