Three Roads to Take
Normally, a divorcing couple divides the family home in one of three ways: one, sell it on the market; two, a buyout of one spouse by the other; three, joint ownership with sale at a later date.
Option one, selling the house on the market, makes for a clean break. It may be ideal for couples without children who want to draw a line in the sand and start anew. In this regime, the couple sells the house, satisfies the outstanding mortgage, and divide the equity between the two of them. Couples often choose this route when they cannot agree about one party staying in the house or when there is a great deal of equity to divide. Moreover, some couples decide to sell the house because the mortgage payments would be burdensome for one spouse to make on his or her own.
Couples who go this route can exclude up to $500,000 from capital gains tax if they file a joint return for the year in which the house is sold. A spouse who files a separate return may exclude $250,000. In addition, a person must have owned the house for at least two out of five years and lived in it for two of five years.
Option two, one spouse buying out the other, means that one spouse remains in the house and pays the other one who has departed. Normally, the remaining spouse pays the departing spouse one half of the fair market value of the house.
Usually, this method requires that the house be refinanced, and this means that the remaining spouse must have adequate credit and finances to take over a mortgage on his or her own. Usually, the reason for refinancing is the payoff of the departing spouse. Refinancing also removes the name of the departing spouse from the mortgage. "The decision whether to sell or keep the house should be made as part of the overallsettlement. Consider the assets and debts you expect to obtain in the divorce settlement, your anticipated income and anticipated support you may receive (alimony or child support). Also consider the tax effects, such as the mortgage interest deduction, which may decrease your tax burden and therefore increase the amount of your income available to you. If you cannot comfortably afford housing expenses, it might be better, overall, to consider selling the house and replacing it with something more affordable," advises one divorce specialist.
Selling the house appeals to some people because it symbolically demonstrates the end of the marriage, but many realtors advise against selling now, "in a down market. Don’t just sell to get out of a bad situation. Don’t sell at the bottom," advise some. (Of course, in many places, no one knows where the bottom is.)
Since the collapse of the market, the polarity between the sellers and buyers has shifted from the former to the latter, so waiting may become very problematic for a couple eager to move forward.
Option three, joint ownership with sale at a later date, often appeals to parents with small children who wish to disrupt them as little as possible. In this routine, the house remains in both names. One spouse departs, and the remaining spouse assumes responsibility for the mortgage payments and maintenance of the house. Later, often when the children reach the age of emancipation, the house is sold and the proceeds are divided.
Each of these routes has advantages and disadvantages that must be carefully considered. Because of economic conditions, some spouses, who might want to use options one or two, now are forced to take option three. And some, according to reports, are even sharing the house during and after the divorce.
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DATE OF SEPARATION – Depending upon the laws of the state of residence, the Date of Separation – called the DOS – has a profound impact on the eventual division and distribution of property and debt, including credit, pension benefits, and other marital assets. As of the DOS, the separated spouses are now in limbo legally and financially and remain so until the actual Date of Divorce. A great deal of money may be at stake. For example, one spouse may share responsibility for any debts incurred by the other; the value of a retirement plan or other marital asset, such as residential property, may fluctuate, often by thousands of dollars.
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