Afford to Keep the House? A Financial Analysis Guide
The number one issue that people wrestle with in the divorce process is keeping the house.
Divorce turns your world upside down, leaving you grasping for stability in the pieces that remain. Many individuals find solace in the idea of keeping the family home, hoping to maintain a sense of normalcy amidst the chaos. However, this decision can come with a steep price tag, or even risk bankrupting you if you decide to keep the house.
Let's examine the situation from a broader perspective. A house:
Is primarily a place to live, not a source of income.
May hold significant equity, particularly if you and your spouse lived there for an extended period, this equity is tied up in the property.
If you're awarded the home in the divorce, could become your most substantial asset. For instance, if the home's market value is $400,000 with $300,000 in equity, half of that equity belongs to you, while the other half belongs to your spouse. By retaining the home, you're essentially locking $300,000 of your settlement into a non-income-generating asset.
Alternatively, investing the money you would receive from selling the house conservatively, could yield over $13,000 annually.
Additionally, the ongoing costs of maintenance and upkeep further strain your financial resources.
Consider the tax implications:
Selling the house while still married benefits from a marital exclusion of up to $500,000 in capital gains, making it tax-free.
However, once you assume sole ownership and sell the property, the personal exemption drops to $250,000, potentially leaving you liable for capital gains tax on any excess gain.
It's essential to approach divorce settlements with foresight and clarity, considering all financial ramifications so you don’t end up bankrupt. Engaging a Certified Divorce Financial Analyst (CDFA®) can shed light on these complexities and ensure that you make informed decisions for your future.
While divorce is undoubtedly challenging, it also presents an opportunity for a fresh start. Taking the time to understand your options and making an informed decision regarding your settlement can lay the groundwork for a more stable financial future.