By: Daniel Goldstein
Tabloids and TV shows are guessing what the movie stars Brad Pitt and Angelina Jolie will do with their portfolio of luxurious homes after they split. But for the rest of us, deciding what to do with a house after a divorce can be a difficult financial experience unlike anything we’ve been through.
“The house is probably the most emotionally attached and hard-to-let-it-go item in the divorce proceeding, particularly for women,” says Rose Swanger, a financial planner with Advise Finance in Knoxville, Tenn. And, according to the American Psychological Association, given that as many as 40% of all marriages in the U.S. eventually end in divorce (814,000 alone in the U.S. in 2014, according to the National Center for Health Statistics), planning for what to do with a home in the event of a breakup isn’t a bad move, according to financial advisers.
A prenuptial agreement probably determines the fate of the homes owned by Pitt and Jolie — such as the famed Château Miraval in Correns, France, which they bought for a reported 40 million euros in 2008, and their $6.5 million home in the French Quarter of New Orleans, says Seth Kaplowitz, a partner at the Blumberg Law Group in Solana Beach, Calif., and a lecturer at San Diego State University.
Still, given that the couple has assets worldwide, splitting them equitably requires careful consideration of not only state-to-state but country-to-country factors, says Kaplowitz. “They would either have to sell the property or agree to exchange it along with cash if necessary to even things out.”
For the masses, here’s how financial planners recommend handling the family home in a divorce:
In the short term, there’s typically a restraining order on the sale of the house or any other financial assets, so you don’t have to worry about a spouse selling a home you no longer live in without your assent. “You cannot do anything while you are in the middle of divorce as temporary restraining orders prohibit the transfer or sale of community property,” said Vickie Adams, a certified financial planner in Manhattan Beach, Calif.
Because of that, it’s important to keep both parties on the deed until the house is sold to keep the full capital-gains tax break, says George Gagliardi, a financial adviser with Coromandel Wealth Management in Lexington, Mass., adding that it can’t be more than three years after one of the parties leaves the home. The temporary ownership arrangement must also be documented in the divorce agreement and on the deed, he says.
“It’s generally not in the interest of the lower-earning spouse to keep the house,” says Chris Chen, a certified financial planner at Insight Financial Strategists LLC in Waltham, Mass., who specializes in handling finances after a divorce. “The house is an asset that consumes resources, and lower-earning spouses often run out of them,” he says, noting that stay-at-home moms, even with spousal support, have trouble qualifying for a new mortgage.
As such, many advisers recommend a sale, even a short sale if the house is underwater (meaning more is owed than the house is worth), or even a “strategic default” where the mortgage goes unpaid until a short sale or loan modification can be arranged and you’re financially prepared to take the hit to your credit. “You have to be prepared, however, to know when your credit is going to get trashed,” Chen says.
Still, sometimes a fresh start in a new home is best. “Everyone can get a new start emotionally and financially,” says Kristin Sullivan of Sullivan Financial Planning in Denver. “Each party should buy a home they can afford with the new split income,” she says. “Yes, it can be upsetting for the kids, but the kids are already upset. Don’t add the financial strain of keeping a house that you can’t afford on a single income to the mix.”
Robin Giles, a financial planner with Apex Wealth Management in Katy, Texas, agrees: “Having a parent struggle financially long after the divorce can be far more devastating in the long run,” she says. “In most cases, if a house is going to take more than one-third of his or her take-home income, they cannot afford to stay in the home.”
Sometimes, it may be necessary to keep the house until the property is no longer in a negative-equity situation or until a child finishes school. In such cases, it might seem easy to simply buy the other partner’s equity in the home using retirement funds, but some planners caution against it.
“Retirement accounts usually appreciate at a much faster rate than houses, so in the end, the client who keeps the house will have a far less valuable asset,” says Giles.
While it’s easier for elementary-school-age children to make the switch to a new home or a community, that’s not always the case, says Chen, in the case of teens. “Teenagers are very tribal. If you take away their circle of friends they get very upset,” he says. “Elementary-school kids adapt more easily.”
For a client of Joe Gallagher, a financial planner with LPL Financial in Mount Airy, Md., the solution for one family’s home in nearby Potomac when neither party wanted to move out during a divorce in 2004 was a bit unusual.
“They literally split the house in half from top to bottom and told the kids if you want to see dad, go to the basement, if you want to see mom, go to the top floor,” Gallagher recalls. “They even had separate entrances.”