Your House

By: Amy Crane, Bankrate.com

When you're splitting up, your home is a refuge in a sea of uncertainty. Your kids are comfortable there, so you may yearn to hang onto that house after the divorce. But does it make financial sense?

Like many other aspects of divorce, it depends. Weigh the expenses involved in keeping the house and what you may have to give up to get it against your desire for emotional stability for yourself and your kids.

Property division is one of the most important decisions during a split-up. "The property division in a divorce is final and you can't undo it even if you realize later that you made a mistake," says Carol Ann Wilson, a certified divorce planner and author of "The Financial Guide to Divorce Settlement." "Other areas of a divorce decree can be changed, such as child support or visitation, but not the property settlement."

While the property settlement is final, there is flexibility in crafting it. Options include co-ownership between you and your ex-spouse for a certain number of years, or taking sole possession and refinancing to keep mortgage payments reasonable.

Dealing With The Mortgage

Although the mortgage is by no means the only expense involved in keeping the house, it's a good place to start. With today's interest rates near all-time lows, refinancing may be affordable and fairly painless. If you're dividing assets, you may be able to buy out your spouse's share of the equity and still keep your monthly payment affordable.

The catch: You must qualify for a mortgage with your own income, a combination of salary, alimony -- if you get any -- and child support. If you can't qualify for a new mortgage, another option would be co-ownership after the divorce is final. Under such an arrangement, you both continue to own the house, contributing jointly to pay the mortgage, taxes and upkeep.

"A lot of times people will co-own the house for two or three years with a drop-dead date by which time the house will either be placed for sale or one party will buy out the other party's interest," says Joan Coullahan, a certified divorce financial analyst in Vienna, Va. "In other cases, the partners in a joint ownership agreement will evaluate on a yearly basis whether they want to continue to co-own."

Co-ownership isn't for everyone: Some couples don't want to be tied to each other financially after a divorce. In some cases, there is so much animosity between the husband and wife that such a cooperative arrangement wouldn't work, Coullahan says. Also, if a spouse leaves his or her name on the mortgage, it may be difficult to qualify for another mortgage for a house of his or her own.

Factor In Upkeep Costs

Besides the mortgage, include upkeep costs of the home in your post-divorce budget. Write down all ongoing costs such as gas, electric, sewer and water bills. Don't forget outside maintenance such as snow removal and lawn upkeep.

In addition to the regular bills, budget for unexpected repairs and regular maintenance. You don't want to be caught short if you need a new water heater.
Katharina Gschwend, a certified divorce financial analyst in New Providence, N.J., recommends hiring a building inspector to evaluate the house and see if any major repairs are on the horizon.

Look at your own records to see what work you've already completed. Also, consider what work you haven't done to spot potential trouble spots. If, for example, the house is more than 20 years old and still has the original roof, add a new roof to your budget.

Consider Tax Implications

Taxes are the last part of the affordability picture. "A lot of expenses are beyond your control, and taxes are one of those expenses," says Gschwend. "Expect that your property taxes will go up, because they usually do."

As property values rise in many areas of the country, taxes increase. Many state and county laws require periodic reassessments, which can significantly increase your tax bill, especially if you've improved the house or prices spike in your area.

The positive side of the tax picture includes the mortgage interest deduction, the head of household deduction and the capital-gains tax exclusion. If you get the house in a settlement, you can deduct your mortgage interest and taxes on your income tax return. In addition, if you have primary custody of the children, you can file as head-of-household, which will give you a bigger deduction than filing single.

If you and your spouse sell the house upon divorce, you each can exclude up to $250,000 of any capital gain. In a joint ownership situation, both parties can also benefit from the exclusion when the house is finally sold.

Trading Assets

If you really want to keep the house, you have to give up something in exchange. "In many cases the house is the major marital asset, and there has to be a trade-off of assets, so the husband usually gets other assets such as the pension or 401(k) if the wife wants to keep the house," says Gschwend.

It's important to get an impartial assessment of the worth of the house so attorneys and divorce financial planners can construct a fair asset swap agreement. Coullahan refers clients to a real estate agent who has access to a database of comparable properties in the same area. If the home is unique or there is a dispute about the value, the couple can hire an appraiser to provide a fair valuation.

Wilson notes that real estate in general is not a liquid asset and that while homes have appreciated rapidly in many parts of the country recently, that may not always be the case. She advises her clients to find out the average appreciation of homes in their areas.

It's a good idea to hold on to some investments or a share in your spouse's 401(k) plan or pension, the planners say. Stock may appreciate faster than real estate, and the lower-earning partner in a marriage -- usually the wife -- doesn't have the ability to replenish retirement and investment assets in the same way as the higher-earning partner, Wilson says.

Consider Downsizing

In some cases, it makes sense to downsize immediately to a smaller house, especially if the expenses involved in keeping the house are more than you can afford. Some people associate the house with their failed marriage and are anxious to start fresh somewhere else.

On the other hand, in some areas of the country, rents and housing prices are so high that even a smaller house or condo may be out of your price range. Also, it may not be possible to find an affordable house in the same or another high-quality school district.

The Long Term

Before making a decision on what to do with the house, both parties in a divorce should consider the long-term consequences. Make sure you're not giving up your financial security in exchange for a house you won't be able to afford in the long run.

Many divorce financial planners and certified divorce financial analysts use specialized software to calculate the long-term effect of various child support, alimony and property settlement scenarios. Involving a financial planning expert in your divorce negotiations can help ensure that both parties are fairly treated.

"I find that when both partners feel they are fairly treated, they will have a decent relationship in the future," says Coullahan. "These issues carry over into parenting, so if the wife made bad decisions in the divorce and didn't get enough financially, it affects the kids too."

Coullahan recommends that couples in this situation visit the Web site Splitup.com which offers a variety of free calculators dealing with property division, sale of the home and income and taxes.