Selling your home is never easy. Selling your home because of a divorce, can be extra challenging. Your kids have great friends, love their school and your commute to work is short enough to get home quickly in the event of an emergency. It's difficult to give up this security as you enter a new stage in your life, where you become a single parent with
You'll want to do some serious thinking about keeping versus selling your home, and make the smartest decisions possible. This means you need to assess how much your home really costs and oops, it's more than just your mortgage. It's also smart to think about the tax consequences of selling your home now or in the future, and do everything possible to minimize the taxes you'll pay when you sell.
Your home is probably the largest asset you own jointly with your spouse which means you've got to decide together, how you're going to divide the investment your home represents. You have 3 choices for handling your home in a divorce — you can keep the house, you can sell it or you can continue joint ownership (yes, you need to understand this option).
Understanding the Costs of Home Ownership
Most homeowners thing their mortgage + taxes = rent that doesn't cover all homeowner costs. There are operating costs like utilities plus maintenance which include big ticket items like a new refrigerator and someday, a new roof. Projecting these costs out to when your youngest child graduates from high school can help you budget living costs more accurately, i.e. to help with negotiations for alimony and child support.
- Financial costs of owning a home include your mortgage plus taxes and insurance. If you own a condo or have a homeowner's association, they'll also have ongoing payments. While your mortgage is fixed, you should assume a yearly 5% increase for everything else.
- Operating costs of home ownership are growing as we introduce more electronics into our homes. Basic utilities include heating, cooling, electricity, telephone (land lines) water, trash removal and don't forget to include lawn and/or pool care if you're used to these services. Electronics now have monthly bills for cell phones, cable, Internet services and more like home security.
- Home maintenance and repair costs represent the biggest surprise for most homeowners. You might give up your cleaning service but you need to maintain your home to protect it's value. For a $200,000 home, you should be budgeting 1 to 2% even if you haven't spent that money the last 2 years. You can defer home maintenance for a few years but ignore a leaky roof or wood rot, and you're inviting health issues. You'll also have more trouble selling your home at the price you want, and risk selling at all when buyers only want “move in ready”.
| If your home is less than 10 years old, project what it will cost to replace home fixtures (exterior and interior). If your home is roughly 20 years old, it's time to sell it because you're entering a period where many home features are reaching their end of life and if you haven't saved for these major expenses (and no one does), it will be tough to handle them now. |
Divorce, Selling Your Home & Taxes
On paper (leaving out the emotional side), the easiest way of selling your home is to do it before you finalize the divorce. That way you'll share the costs of preparing the house for sale, actual sales costs and you can exclude up to $500,000 of capital gains. If you become the sole owner of the house, and sell later, you assume all selling costs but can only exclude $250,000 in capital gains.
Surprised? By taking ownership of the house, you lose the capital gains exclusion for your ex because the capital gains exclusion only applies to a primary residence that you've lived in for a minimum of 2 years (of the last 5 years). If you want to delay selling your home, here are a few tips on protecting your capital gains exclusions:
- Specify in your divorce documents, rules for selling your home like when the children have graduated from high school.
- When continuing to own your home jointly, get a written agreement or court order giving you exclusive use of the house, even though your ex's name is on the deed. According to the Women's Institute for Financial Education (WIFE) “… keep your ex’s name on the deed. The house will then be considered your ex’s primary residence as well, and he will preserve his ability to exclude $250,000 of gain when the house is sold.”
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