Keeping the Marital Home in Divorce Could Potentially Bankrupt You

by | May 9, 2022

Divorce feels as though everything you thought you knew about your life and your future is suddenly flipped upside down. It can be a struggle to make sense of the pieces that remain. It’s common for a person to want to stay in the current marital home and retain some semblance of normalcy. While it seems like you are clinging to stability by staying there, be aware that it may also be a very costly financial mistake to do so.

So, let’s look first at the big picture. Your primary home is just somewhere to live and doesn’t provide any income to support your lifestyle or family. If you and your spouse lived there for a long time during your marriage, it’s highly likely that there is a large chunk of equity trapped inside those walls. If you are awarded the home in the divorce, it could be one of the largest assets in your settlement.

Let’s assume your home has a cost basis of $225,000, a current market value of $725,000, and there is $300,000 in equity. As marital property, half of that equity is yours, but the other half is your spouse’s. So if you keep that home, then a full $300,000 of your settlement will be tied up in that property. That same money could generate over $13,000 a year in income if it were invested conservatively at around 4%. And have you considered the costs of upkeep and ongoing maintenance that will increase the income necessary for you to make ends meet?

But wait, there’s more. The potential tax impacts upon sale could be staggering! If you sell the house while you are still married, the capital gain exclusion on the profits of up to $500,000 would be income tax-free (under current tax law).

Once you transfer that home solely into your own name, and you sell it as a single person, the capital gain exclusion is only up to $250,000 of the profits (under current tax law)! That’s a huge difference in the end towards your bottom line. Did your Attorney remember to take this into consideration in your settlement discussions?

This is yet one more reason I strongly advocate for using out-of-court divorce process options such as Mediation or Collaborative Divorce, where a financial neutral such as myself can help by working with both you and your spouse on developing creative settlement options.

Divorce is difficult but you also have an opportunity for a fresh start and getting off on the right financial footing is essential to your future. You only have one chance to get your settlement right. Take the time to gather information and make sure you are making informed decisions.

To be certain that you understand all the ramifications of any property settlement you are considering, bring in a Certified Divorce Financial Analyst® (CDFA®) to shine the light on all these issues. It may be one of the best investments you ever make.

Contact my Panama City, Florida office at (850) 252-6325 to schedule your complimentary 30-minute initial strategy session.


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