For many American families, their home is their castle. When divorce is on the horizon, your castle may fall under attack. Florida’s property division statute requires an equitable distribution of all marital property, but it is not a how-to guide. Money magazine has an article looking at some of your options.
The Coronavirus Crash
Before the silent enemy Covid-19 hit us, the median value of a home in the U.S. was $247,084, and the average amount of mortgage debt a person topped $202,000.
With many experts predicting the coronavirus siege will lead to a surge in divorce, deciding how to deal with your marital home – and its accompanying debt – can be a dangerous financial burden in every case. Below are some strategies to defend your castle.
Selling the Castle
For many couples simply putting a shared home up for sale may seem like the simplest solution, but remember, that step won’t automatically erase all mortgage headaches or end the need to co-operate with your former spouse.
You will still need to agree on a realtor and asking price as well as determine how the continuing mortgage payments will be made. Will you be splitting the expense 50/50? Will the spouse who continues living there make the full payment?
If your home sells for more than the outstanding balance on the mortgage, how will the remaining proceeds be divided between you both after settling the joint debt? Worse, if you end up underwater on the mortgage, you’ll have to decide if you can even afford to sell it and how you’ll pay off the remaining debt if you do.
There are also the taxes. You can each exclude the first $250,000 in capital gains — the amount your home has appreciated in value since you bought it — from your taxable income, if the home was your primary residence and you owned it for more than two years.
If you opt to file a joint tax return, you can exclude up to $500,000. Earnings above that exclusion or on the sale of, say, a vacation property, could stick you with a tax bill.
Keeping the Home
Divorce upends life, and it makes sense that a majority of the time at least one spouse isn’t ready to leave the marital home and add the stress of moving to their to-do list.
The idea of remaining in a familiar, comfortable home can seem even more compelling when there are children who might have to change schools or leave behind friends.
But many financial advisors and divorce attorneys caution against keeping your old home after a divorce, calling it one of the biggest mistakes you can make during the process.
If you want to remain living in the home you once shared with your ex-spouse, you need to carefully review your budget and weigh whether you can individually afford it.
Refinancing the Mortgage
If you have $50,000 in equity in your current home and you’ve agreed to a 50-50 split of its value, you’ll need to come up with $25,000 to buy out your former spouse. In return, your ex-spouse should remove their name from the property title, typically using a quitclaim deed.
If you don’t have the cash, you might need to give up other assets in the divorce negotiations equal to the home’s equity, such as your investment account, 401(k) or IRA.
However, qualifying as a single person can be challenging as lenders will examine your individual earnings, credit history, and savings to see if they believe you’re capable of repaying the loan.
Staying Co-owners of the Manor
If you are unable to refinance or payoff the mortgage, you may be able to keep the status quo. This is not recommended, as it requires a high degree of trust in your former spouse.
Since both your names will remain on the home and on the mortgage, you’ll both be liable for making payments. Should your ex-spouse stop contributing their share, you could face more debt, foreclosure, bankruptcy or poor credit.
Florida Property Division
I’ve written about houses and property divisions before. In Florida, every divorce proceeding the court has to set apart nonmarital property, and distribute the marital property.
Florida judges always begin with the premise that the property distribution should be equal, unless there is a reason for an unequal distribution based on several factors.
One of the factors the court has to consider is the desirability of keeping the home for the kids or a spouse, if it’s equitable to do so, if it’s in the best interest of the child, and financially feasible.
However, whether keeping the home for yourself or the kids is financially feasible requires you to have an honest look at what you can and can’t afford. Some strategies to keep the home include:
Raiding Savings
While not the best solution, pulling from savings can help you keep hold of the home. By obtaining a court ordered qualified domestic relations order or QDRO, you can gain access to a portion of your ex-spouse’s employee retirement plan assets.
Such funds may not be subject to the 10% early withdrawal penalty for people under age 59.5, meaning you’ll save more on taxes by using this money to secure your home than you would by tapping other accounts you may have.
Alternatively, if you have Roth IRA savings, you could pull an amount equal to what you’ve contributed tax and penalty free, again making it a smarter way to meet your mortgage payment needs.
Raising Rents
If you’re really determined to keep the home, but cannot pull from savings or refinance, it might be worth brainstorming ways you can earn income from it to help cover the mortgage and upkeep costs.
Renting out the whole home while you’re on vacation – or even just a bedroom or two when in town – could make you hundreds a night. Airbnb hosts, for instance, can make over $900 a month according to research.
If you can’t refinance the mortgage in your own name, keeping the home isn’t a wise decision. It is better to restructure your life in a way that makes sense in the long run, rather than pillage your other financial accounts.
The Money article is here.