Getting a Deal: When to Take the House or Let It Go in a Divorce

When it comes to dividing assets, including real estate, getting divorced is really no different from dissolving a business partnership. The “partners” hash out a contract designating how the spoils will be divided so they can go their separate ways. One important thing to watch out for in accepting the family home as part of your divorce settlement package, particularly in today’s housing market, is whether doing so actually is a good deal for you.

 If you decide to keep the family home for the purpose of cashing out by selling it after the divorce, don’t get shortchanged in your divorce settlement because you neglected to calculate the value of equity in the property, potential tax consequences and expenses. If you give up other marital property or assets in exchange for real estate, do not accept a settlement package without first determining what a sale of the property would actually net.

Calculate Your Equity

Equity in a home usually comes from three places: the down payment, payments applied to principal (mortgage payments are composed of principal, which is the amount you borrowed, and interest on the principal), and increased value or profit from appreciation. If there has been depreciation, you will have lost equity in your home. Make sure to determine what you would net after a sale by determining what the difference is between the fair market value of your home (Be Careful, in this housing market, the fair market value may fluctuate in a very short time span) and the amounts owed to any lenders.

Calculate Costs, Fees and Taxes

Once you determine your equity, you will next need to calculate what other costs will come out of your pocket and reduce your net profit upon a sale of the marital home:

• Attorney’s Fees: the seller’s attorney usually drafts the sales contract and is in charge of the closing, and will charge a flat fee.

• Land record filing fees.

• Title preparation fees.

• Fees to the title closer (depending on your county or jurisdiction).

• Mortgage closing (termination) fees to the lender (depending on your financing).

• State real estate sales tax and special land transfer taxes.

• Capital Gains: the Federal tax on real estate.

• Capital gains taxes are taxes on the gain in value of your property from the time you purchased it. The profit you make from your sale may be reduced because of a capital gain.

Since 1997, the capital gains laws have been extremely favorable to married couples. Under the current laws, married couples filing joint tax returns who have resided in their primary residence for at least two of the past five years, do not have to pay capital gains taxes on up to $500,000 in profit. So if your home sells for less than half a million dollars, or the house appreciates up to half a million dollars, your profit is tax-free.

But all of this can change depending on the timing of your home sale following a divorce. Make sure you don’t wait too long and risk losing out on the Married Couple’s Exemption. If you alone own the house for a certain period of time after a divorce, you may eventually fall into a single tax filer capital gains bracket depending on when you sell it. This would only allow you to exclude up to $250,000 in gain as an “unmarried” home seller. Therefore, you could owe capital gains taxes on the portion of your profit that exceeds $250,000.

Make sure to seek expert advice on whether the sale of your marital home is subject to federal capital gains taxes and discuss any real estate sale, potential sale and the timing of your sale with an accountant or attorney to learn exactly what tax consequences you may face.

And remember, while keeping the house in a divorce in lieu of or in exchange for other assets may seem like a good deal at first glance, make sure the numbers work out on paper before you sign on the dotted line.

Editor's note: He Had It Coming: How to Outsmart Your Husband and Win Your Divorce.

For more great advice on protecting your assets from loss during a divorce, be sure to read Stacy Schneider's terrific new book