Don't Let Keeping the House After a Divorce Bankrupt You!

Don’t Let Keeping the House After a Divorce Bankrupt You!
January 19, 2022 counterbalancedivorce

Let’s talk about your divorce and how your house could bankrupt you. Divorce has a way of turning things upside down. That’s not always a bad thing, but it can be disruptive to your life. Your life may no longer be recognizable. You’re left trying to put the pieces of the puzzle back together, trying to make sense of it all.

Stability, But at a Cost

During a divorce, you may find yourself reaching for anything familiar–for stability in these moments. It is normal to want to keep the house in a divorce—to cling on to some piece of normalcy. That makes perfect sense. It’s the place you’ve called home. It may have been one of the only constants in your life. But while your desire may be for stability, keeping the home after a divorce may be a costly misstep.

Yes, your house is a place for you to live, but it doesn’t provide any income to support your lifestyle. If you and your spouse spent some time in the home, you might have a large amount of equity built up. Meaning if you are awarded the house, you may be receiving the largest asset in the settlement. But is that the best option for you financially?

woman looking at home repairs that could bankrupt her after divorceLook at Both Side of the Equation

Think about it – say your house has a market value of $500,000, and there is $400,000 in equity. With marital property, half of that is yours, and the other half is your spouse’s. If you decide to keep the full equity, that will make up $400,000 of your settlement, tied up in one asset!

But, if you took that $200,000 and invested it instead, you could generate consistent dividend income every year. Income that you might need. But this only takes into consideration the income side of the equation. If you keep the house, you will need to think about upkeep and maintenance, increasing the amount of money you will need monthly to make ends meet.

A Bigger Tax Bill

And not only do you need to think about making ends meet over the next few months, but you also need to think about what may happen with taxes over the next few years. Let’s use our example above. Assume that of your $400,000 in home equity, $350,000 of that amount is taxable capital gains. You don’t recognize any gain if you sell the house while still married because each spouse can recognize $250,000 of gain tax-free.

But if you transfer the home into your name after the divorce and then sell it, the maximum personal exemption allowed is $250,000. You would recognize $100,000 of gains and could owe almost $15,000 (or more) in taxes. Did your attorney remember to consider that during settlement discussions? This is why I recommend having both a Divorce Mediator and Certified Divorce Financial Analyst (CDFA) brought in to help you sort out the finances properly.

While the divorce process can be complicated, it always creates an opportunity for a fresh start. It gives you a chance to make a financial future for yourself that feels safe and secure. Don’t be afraid to talk with a CDFA about your settlement; you have one shot at getting it right! By making smart moves from the start, you reduce the risk that your house might bankrupt you after your divorce.

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