Contributed by: Jacki Roessler, CDFA®
As we head away from the lazy days of summer in Michigan and families are securely back in their school-time routines, many divorcing clients turn their focus to questions about how to handle the marital home. In fact, lately, it’s a question I hear at least once a week. Read on for important factors to consider and some often overlooked tips.
There are three general ways to treat the marital home in a divorce.
With Option A, one party keeps the home and pays the other party their equitable interest, either from home equity or from their share of another asset. Let’s assume a couple has a home with an appraised value of $300,000 and an outstanding mortgage of $200,000. If the wife retains the home, she owes the husband $50,000 for his share of the equity. To pay him, she can re-finance the mortgage for $250,000 and give him $50,000 in cash, or the husband can take his $50,000 from the wife’s share of a bank or investment account or a pre-tax equivalent amount from a retirement asset.
Option B is to list the home for sale and split the net proceeds. Using the same example as above, let’s assume the home is sold for $300,000. After paying off the mortgage lien and deducting 8% in closing costs and sales commission ($24,000), the remaining equity is $76,000. In this scenario, both parties would net $38,000 in cash.
Lastly, with Option C, the parties jointly retain the home (as Tenants in Common) for an agreed upon number of years, at which point the house would be sold and the proceeds split. At the time of sale, whoever was paying down the mortgage would receive credit for any portion of the principal paid in the intervening years. This type of arrangement often allows one party the option to buy out the other’s interest at a future date, and at an agreed upon value.
Many couples find the most difficulty in separating the financial and emotional aspects of the house.
For many, the house comes with a mortgage payment and with property tax obligations, insurance, maintenance and upkeep costs. The financial burden may not be worth the comfort of keeping it. For others, staying put may be the most cost-effective option. The best tip I can give my clients is to carefully itemize all the potential, realistic costs associated with the home before making an emotion-based decision about who should keep it. Take stock of needed repairs, appliances reaching the end of their life, and what it costs to keep the house warm in the winter and cool in the summer.
Another important financial consideration is to make sure the home is properly valued.
I’ve had many clients use a quick, free, internet-generated estimate rather than spend money on a qualified appraisal. If the house will be jointly retained and sold in the future, or sold at the time of the divorce, an appraisal isn’t necessary. As a financial planner, I never want clients to needlessly spend money. However, if one party is buying out the other’s interest in the home, it’s imperative to get a reasonable (and hopefully neutral) appraisal by a qualified appraiser. If the house needs a new roof or just had a sprinkler system installed, the internet estimate won’t include that. Realtor appraisals generally aren’t acceptable for this purpose.
As always, each couple’s situation is unique, and their circumstances should receive a critical analysis. Seek advice from an experienced financial advisor.
Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.
Opinions expressed in the attached article are those of Center for Financial Planning, Inc and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The scenarios described are hypothetical examples for illustration purposes only. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.