| Keeping the house in a divorce |
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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.
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.
Amy Crane is a freelance writer based
in Erie, Pa.
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