by Bruce L. Dorner
There are times when cooperation between divorcing couples is quite encouraging. There are other times where disputes rage long and hard. Reducing conflict is always the desired objective. As to keeping the marital home for the growing children, that’s another issue.
It is quite common that both Mom and Dad want to find a way to keep the kids in the family home until they finish high school. It is a traditional belief the divorce will cause significant stress for the children. Often, both parties want to find a way to keep the kids in their regular bedrooms, but don’t know how to financially support the house.
First, let’s examine the financial reality. Both Mom and Dad are working. The income is adequate to support the house. However, when one spouse moves out and needs his or her own apartment or house, the available cash falls short to meet the monthly mortgage and related expenses. After all, even with a divorce, each party is entitled to a reasonable living situation. Sometimes, the numbers simply don’t work and selling the house is necessary. However, with a little creativity and a lot of cooperation another solution can be fashioned.
For our example, let’s assume that Dad is moving out and Mom will stay in the house with the kids. Dad is going to rent an apartment with enough bedrooms that the kids can spend some nights and weekends with him. They are in complete agreement that the kids need to be able to move freely between both parents and that the parents will have an agreed schedule so the kids get the best emotional support that each parent can offer.
The starting point is cash flow. Just how much money is needed to keep the ship afloat? Often, refinancing the house before the divorce process starts, provides the needed relief. Stretching the payments over a longer period of time will reduce the monthly burden. However, it will also decrease the amount of equity each party has in the home.
Sometimes it makes sense to keep the house in the names of both parties. Sometimes it makes sense to transfer it to one or the other. Occasionally, using our example, Dad will pay the mortgage and have some of this money characterized as a portion of his child support obligation. Sometimes it makes sense to put the house in Mom’s name and have Dad pay alimony roughly equal to the mortgage. The benefit of alimony is that it is tax deductible by Dad and taxable income to Mom. Since Mom gets all the tax benefits of the interest deduction on the house, this often helps to equalize the tax benefits and burdens between the parties after the divorce.
Sometimes we also share the equity in the house when a specific event happens. Often the parties agree to sell the house when the youngest child graduates from high school. A second “trigger event” would be the event of Mom getting remarried. After all, Dad won’t want to pay for a house for Mom and her new husband. A ratio is computed as to the equity each party holds and the proceeds are distributed after sale. If the financial condition has improved over the passage of time, often one party is able to refinance the house to pay off the other.
I’ve also seen some very creative mechanisms. Consider that Dad has enough resources to buy out Mom’s interest in the house, but he really wants the kids to stay there. If Dad gives Mom the cash for her interest in the house, she now has disposable resources and the comfort of a bank account. Dad takes title to the house and agrees to be fully responsible for all the carrying costs. Mom agrees to handle the day-to-day expenses. Dad charges Mom a reduced rent which helps to offset his child support obligation. Mom has occupancy of the house and can stay there at a reduced rent until the kids finish school.
There is no “right way” to address the handling of the marital home. There are more options and choices than there are nooks and crannies in an English muffin! It merely takes time, patience and creativity to find the method that works best for your family.
As with any of these tools, there are significant tax implications pertaining to your primary residence. You need to talk with your tax advisor for solid recommendations as to the impact any changes would have on your personal tax return.