This article is part of a 5-part series on what divorcing couples might do when faced with the pressing question of what to do with the family home. This fourth option, continued home co-ownership of the family home post-divorce, is gaining traction for one simple reason – interest rates are as high as they’ve been since 2001 and still rising. Due to this unfortunate reality, many couples are considering an option which was once rarely employed – “should we continue to co-own the home and defer a sale until a later date?”
What should we know about home co-ownership post-divorce?
Home co-ownership does not mean you’re going to continue living in the same house with your ex-spouse. Rather, it means you’ll continue to be joint financial owners of the home and co-obligees on the mortgage. It is, for all intents and purposes, a financial arrangement.
There are parents who choose to keep the house together to participate in a parenting relationship called “nesting.” In this case, the children remain in the home full-time and the parents trade places – one parent lives in the home with the children during a set time (perhaps a whole week, or portion of a week); and the other parent then swaps places and lives in the home during the alternate times. A nesting arrangement is most commonly utilized in the beginning stages of divorce to allow children time to adapt. It also requires that the parents secure alternate living arrangement during their “off-time”– such as a rental unit.
With a co-ownership arrangement – and regardless of whether you “nest”– you’ll need to select a later date at which you agree to sell your home. The deferred sale date might be, for instance, when the youngest child graduates high school. Or you might select different windows of time at which point you’ll confer on the feasibility of a sale given the status of your personal circumstances, the housing market and interest rates.
What are some advantages to continued co-ownership?
Co-ownership should allow your children (and possibly you) to remain in the same home which will provide stability during an uncertain time. Keeping familiar routines and surroundings can help to calm nerves and offer reassurance.
However, the most obvious advantage to co-ownership is not a matter of emotional care, but rather brass tax. People choose this option because they are underwater on their house or they are intent on keeping their low-interest mortgage. They may find it untenable, or impossible, to refinance into a higher rate mortgage on a solo salary. And there may be fears that if they sell the home, they’ll have trouble finding a suitable replacement given the status of rising rates.
What are the disadvantages to continued co-ownership?
There are many risks divorcing couples should be aware when contemplating continued co-ownership of the family home.
First, there is the issue of financial entanglement. You do not get the “clean break” so many desire when ending a marriage. And your credit remains at risk when co-signed to a mortgage. If there is a late payment or default, your credit is at risk regardless of whether you live in the house.
Second, if you are the departing spouse, you may find it difficult – if not impossible – to qualify for a mortgage on a new home. An existing mortgage will encumber your capacity to take on new debt. Lenders, as noted, inspect your debt-to-income ratio, and an existing mortgage may be a significant debt. Consequently, as the departing spouse, you may be stuck in the rental market for years to come.
Third, there is the issue of the capital gains exclusion – especially as it impacts the departing spouse. A capital gains exclusion is available to married couples in the amount of $500,000; and $250,000 for single individuals. However, there is an important caveat – to qualify for this exclusion, you must have lived in the house for at least 2 of the past 5 years. Therefore, if you are the spouse that leaves the family home – yet continue to own it—you may not qualify for this exclusion. This means that your eventual house proceeds, which might otherwise be exempt from capital gains, will be subject to 15-20% of taxation.
Finally, there is the stark reality that courts may not approve this arrangement. Courts prefer certainty – a family home that has been sold, is pending sale, or has been refinanced. They do not embrace arrangements that are filled with contingencies and require future agreement. Co-ownership, unfortunately, lacks an exacting certainty. Without question, there are many courts that will approve a co-ownership agreement. These arrangements are on the rise. But you should be aware of the risk that a court may not approve of your agreement.
What type of agreements will we need in place to proceed forward with co-ownership?
There are many contingencies and agreements that need to be ironed out in order to co-own the family home. Here are a few examples:
- How will you pay the mortgage? Does one spouse pay the entirety; is it a 50/50, or some other ratio?
- Who pays for the utilities, insurance, taxes, or HOA?
- Who pays for general upkeep and maintenance of the home?
- Who will pay for major improvements? And how do you decide whether major improvements should be made?
- How to handle the mortgage interest deduction as an unmarried couple?
- What if the spouse remaining in the home cohabitates with a new partner or remarries?
- What if one of you dies?
- When do you agree to sell the home? What arrangements need to be in place in order to sell?
- How will you divide proceeds from sale of the home?