Your family is splitting up. You may want to understand Divorce Tax Issues related to your situation. With so much changing, you want to make sure you can keep the house. It’s where you have raised your children and created memories. Emotionally, you can’t imagine leaving the house behind or being happy anywhere else. You just want your ex to agree on how to do it and trade other things as part of the divorce to make that happen. Whoa, slow down. Be careful what you wish for.
There are many pieces to consider before you trade assets in your divorce. Your house may be wonderful in many ways, but think about what the financial hits may be for you if you choose to keep the family home. Make sure you spend time with an experienced financial expert and legal counsel before you make any decisions.
First, make sure you know what the true cost of your home is on a monthly and annual basis. These considerations are beyond the mortgage(s), home insurance and the property taxes on you home. Unexpected expenses could include future adjustments of the interest rates on your loan, winter and summer months that create huge PG&E bills and deferred maintenance, i.e. new roof, landscaping or unexpected repairs. Once you understand what your total annual cost will be; then ask yourself, will your income, support and assets be enough to support you? If yes, then how long?
Second, many divorcing people don’t take into account the tax hit they may face in the future when they sell the house—it’s called capital gains. So, depending on what you paid for the house originally (not when you buy out your spouse’s interest) and adding on improvements made to the house, if the value of your home went up or goes up significantly, there could be a substantial capital gains tax to consider. Even with some tax exclusions currently available, you may be in for an unpleasant surprise.
For example, if you sell your house as part of the divorce and split the profits, jointly you will have $500K to offset capital gains. If you sell your house subsequent to your divorce, then you would only be eligible for a $250K offset to capital gains under the current laws.
Imagine 5 or 10 years after you divorce, you find yourself being plagued by unexpected expenses and you are now forced to sell your property to maintain your lifestyle. You may not be able to command the price you deserve because of the “fire sale” nature of the transaction or you could lack the resources to spruce it up for sale to maximize its appeal .You also may pay an increased amount of capital gains tax, leaving your future lifestyle uncertain.
Divorce Tax Issues are real, so, do your homework first and make sure you know if keeping the house is sustainable for the long-term; and be careful what you wish for.
**All information provided on this blog is for general information purposes only and is not intended to be tax or legal advice. No client relationship is formed nor should any such relationship be implied. Be sure to consult with professional advisors before taking any action.
Elaina C. Serotte, Certified Divorces Financial Analyst, has over 15 years serving clients as a Senior Financial Planner. As a CDFA™, Elaina helps divorcing clients increase the chances of arriving at a settlement that fully addresses their long-term financial needs and goals.
Elaine Ryzak Fraser is a family law attorney with more than 30 years experience both in the conference room as a collaborative and mediation attorney and in the courtroom as a seasoned litigator. Her practice is in Burlingame, CA, where her specialties include divorce, spousal and/or child support, custody matters, property (asset) characterization and distribution.