Typically, the marital home in divorce either gets sold or one spouse buys out the other spouse but these days we’re seeing more and more cases where this isn’t what people want. Couples are wanting to know how to keep your house with your ex after divorce.
What’s driving these conversations are rising interest rates making it difficult to refinance. Home prices are also going up making it impossible for both spouses to purchase a new home after divorce. Rising home values also create the opportunity for increasing home equity. That makes this an attractive investment opportunity.
If keeping the marital home is what you both want, then there’s no reason it can’t be. There are however many details that need to be thoroughly thought through and incorporated into your divorce agreement.
For this Conversation, I’m joined by Joe Dillon of Equitable Mediation. Joe has over 20 years of financial experience and specializes in helping divorcing couples complete the steps to divorce peacefully, fairly and cost effectively, without attorneys.
Listen in below or keep reading for a synopsis.
What Arrangements Are We Talking About Here?
Broadly, this covers any arrangement where both spouses continue to own the marital home together after divorce. That could mean that one spouse lives in the house, often with the kids while the other party lives elsewhere. It could mean that the adults are nesting so the kids stay in the house and the parents rotate in and out. It could also mean both adults continue living in the house, which is sometimes referred to as living separately under the same roof.
“I would say five years ago, some of those would be unheard of,” said Dillon. “Today, all options are on the table and we’re seeing clients take each of those options in pretty much equal fashion.”
The same considerations also apply for couples who are renting and it would be too costly to break the lease. Typically, in this situation the agreement is for a much shorter period and is just until the lease ends.
When Will The Arrangement End?
It might seem odd but the best place to start with figuring out keeping the marital home with your STBX is to think through how long you expect this arrangement to last. As with many things in divorce, you and your SYBX may have opposing interests.
The person who gets to live in the home naturally wants to stay as long as possible whereas the other party might be renting and is not able to qualify for another mortgage as long as their name is on the mortgage for the marital home.
“So now you have this dynamic between the couple where one is entrenched, one wants to sell,” said Dillon. “You really need to decide that upfront.”
Dillon identifies four different types of exit strategies:
- Event-based – typically these are triggered by milestones such as a change in a child’s school, high school graduation or a new intimate partner.
- Duration-based – this would be to give one party a specified period of time to get back on their feet and be able to qualify for a mortgage on their own. It might be to allow for the completion of an education or training program, going back to work or could be simply the end of a lease.
- Price-based – in this situation, the house prices might be rising and both parties agree that the house will be sold once they can get $x. That price point could be determined by any number of reasons such as what has been paid in improvements or what is needed so that both parties will each be able to buy another property.
- Default-based – this is worst case scenario where the mortgage payments aren’t made and the house is at risk of going into foreclosure.
You would also want to include that the arrangement can be ended at anytime by mutual agreement.
What Happens At Exit?
Next step is to determine the options at the end of the arrangement. There might be clear agreement that one party wants the option to buyout the other party, or that both parties agree the house will be sold. What will you do if you both want to buy the property?
It’s best to put as much detail into this as possible. That might include how you will determine the then market value for buyout purposes, how you’ll choose a realtor and how you’ll work together on the sale.
And of course, there needs to be agreement on how the equity in the house will be shared. You might want to take into consideration who will have been making the mortgage payments and if that increases that person’s share of the house equity. Offsetting this is the argument that the non-resident party has been renting and maybe living in a less than ideal situation to accommodate the wishes of the residential party.
There isn’t any right or wrong answer to this. It really is about what is going to work for you and one of the benefits of mediation is that you do get to make that agreement yourselves.
What Are The Expenses And Who’s Paying Them?
You also need to identify all the expenses associated with owning the marital home and then decide who’s paying what. Broadly they are mortgage-related, utilities, home maintenance and capital improvements.
Mortgage-related expenses include not only the mortgage payment itself but also property taxes and home owner’s insurance. This discussion is not limited to who is making the payments (or if they’re shared in some proportion). You also need to decide who gets to take any available tax deductions. With the increases in the standard deductions from the Tax Cuts And Jobs Act 2018, many people may not be eligible for the mortgage interest and property tax deductions so it’s smart to discuss this with your accountant. It would also be a good idea to allow flexibility to accommodate changes in your tax situation and future changes in the tax law.
“I think we can all agree that you want to minimize the amount of money you pay in taxes to the federal and state government,” said Dillon. “That’s one thing that divorcing couples get to agree on.”
The Utilities category is straight-forward. It’s everything that’s associated with living in the home – electricity, gas, sewer, water, trash … Typically we see the residential party taking full responsibility for these because the non-residential party will likely have their own expenses in this category.
Home Maintenance includes those tasks that are required on a regular basis to keep the home in good-working order. They include things like furnace and air conditioner servicing, gutter cleaning, spring and fall yard clean up, lawn care and repairs such as fixing a leaky faucet.
This is not just about who is paying for these expenses but also who is going to take responsibility for doing the work or hiring a contractor. While the residential party may take full responsibility for these, there might be some consideration for sharing repair costs for known issues that have not been addressed.
For the last category of Capital Improvements, you’ll want to define what counts as a Capital Improvement versus Home Maintenance. You might choose to follow the IRS definition so it’s any expense that contributes to the cost basis of the house or you might agree that it’s any single expense in excess of an agreed dollar amount. Since these improvements (or lack of) can have a significant impact on the value of the home, you’ll want to agree that they do have to be jointly agreed.
Often the resident party is the lower-earning party. It maybe necessary for them to have someone else renting part of the home to make staying in the marital home financially viable. This might be a relative such as a parent or sibling or a friend. It could be a month-to-month arrangement, it could be a longer rental agreement and it could also be an Airbnb type arrangement. These are generally roommate situations and are seen and treated very differently from co-inhabiting with a new intimate partner.
You’re going to want to discuss what arrangements are permissible, taking into consideration that your children are also going to be living there and then how the associated income is treated.
Protecting Your Investment
Since you’re continuing to co-own the house, you both have a vested interest in making sure that the person who is supposed to be taking care of specific items is doing so and if they don’t that you are protected.
Imagine, for example if the resident party who is supposed to be paying the utility bill doesn’t, the power is shut off, that causes the pipes to freeze, a pipe bursts, the wood floors are ruined and it comes out that the homeowner’s insurance hasn’t been paid either.
Another example would be the resident party that allows your kids to host a party at the home and provides alcohol to the kids. One of the kids has an accident on their way home and the police are then involved …
There’s some things you can do to monitor that payments are being made, such as sharing log on information to online accounts but you’ll also want an indemnification clause.
“The idea here is if there were to be any fees or legal costs or other costs or problems associated with that non-payment, the person who was responsible is the one who’s going to pay those legal fees or costs and is going to defend the other party,” said Dillon.
It’s still going to be stressful if things do go sideways but you’ll have some comfort that you’ll have some financial protection.
“Make sure deep in your heart you have a really good sense of the party who’s going to be there, that they are responsible, that they’re going to care for it, and that you are somehow limited in your liability,” said Dillon.
My guest for this Conversation, was Joe Dillon of Equitable Mediation. Joe has over 20 years of financial experience and specializes in helping divorcing couples complete the steps to divorce peacefully, fairly and cost effectively, without attorneys. Visit Equitable Mediation to download your free copy of 10 Compelling Reasons To Mediate Your Divorce.