January is the busiest month for divorce filings. Some couples decide to stay together through the holiday season and begin the often painful, sometimes overwhelming divorce process at the beginning of the new year.
During this process, some people decide to keep their marital home instead of selling it. Some of them make the decision to give up valuable assets—a pension, 401(k), or even liquid savings and investments.
This decision often turns out to be a terrible financial mistake in the long run that can threaten their financial stability and security as they age, especially for women.
3 Emotions Tied to a Home During a Divorce
I’ve observed three emotions pertaining to the house during the divorce process: guilt, disappointment and anxiety.
1. Guilt: It is understandable why a mother would not want to sell the marital home, especially if she has one or more children under the age of 18.
Even mothers of children in college want a warm, familiar place for their children to spend the holidays and summers.
2. Disappointment: Imagine the woman who spent countless hours making a house feel like a home by furnishing, arranging and maintaining it.
Children were raised. Memories were established. She felt proud and secure in that home and now has to entertain the prospect of never setting foot in it again.
3. Anxiety: Moving is an overwhelming experience. Downsizing to a condo or rental apartment means important choices must be made about what to keep, sell and store.
Unfortunately, these emotions can drive people to preserve the status quo for themselves and their children, even while it may be financially detrimental to them. Here are three reasons why selling the marital home is often far superior than trying to keep it.
3 Reasons Not to Keep the Family Home
1. Affordability. The cost of homeownership is high. Can a recently-divorced woman afford the mortgage, property tax, utilities, insurance and on-going maintenance on her own?
Despite the tax benefits of homeownership, in cases of divorce, renting for a few years can be more financially prudent than staying in a home one cannot afford.
2. Capital gains tax. In many parts of the country, housing prices are at historical highs. If a couple sells a home while still married (or in some cases even after a divorce), $500,000 in capital gains can be excluded before tax is owed.
However, if a woman takes sole title to the property and ends up selling the home at some point in the future, she will only be able to exclude $250,000 in capital gains before tax is owed. Depending on her federal and state tax bracket, she could be on the hook for tens of thousands of dollars in taxes.
3. House rich, cash poor: What good is a nice house if you don’t have enough cash to pay for life’s expenses?
I’ve seen too many women give up their rights to the couple’s savings, investments and retirement accounts to keep the house.
Women who understand the difference between what is merely a house and what is truly a home will be more likely to financially thrive, rather than just survive, after their divorce.
Laurie Itkin, CDFA, Series 65