EP 123: Marital Home (Part 3 of 4) — Selling the Home Can Cost More than You Expect

This episode continues the four-part series on the marital home during divorce.

The first two episodes helped you assess whether you can afford to keep your home, and gave you some points to consider if one spouse is keeping the home.

What are all the costs if you choose to sell the house?

Selling a home comes with mixed emotions. A lot of people feel like they cannot bear to sell their house because they are so attached to it. However, sometimes selling the house is the best thing you can do. Your next house may not be as nice, but many people feel a sense of relief after they sell it. Moving out of the marital home gives them a clean slate to start their new life. It can help you move on, both emotionally and financially.

When deciding to sell your home, there is one main question: How much will you get out of the sale? This question might seem simple, but it is actually quite complex. It is not just asking what the value of your home is, but what you will get to keep after all the expenses of selling a home. In the next episode, you will learn about appraisals and how to determine the value of your home.

There are three main expenses associated with selling a home:

1) Selling costs.

Assuming you use a real estate broker, you will pay them a commission of 5-6% of your home’s selling price. However, there are other selling costs, including escrow costs, recording costs on the sale, title insurance, and repairs (to prepare your house for sale).

You may have housing-overlap expenses. They include paying for a new home or apartment, but still paying the mortgage on the marital home. These selling costs can add up. Depending on where you live, your total selling costs could be 10% of the value of the house.

2) Paying off the mortgage.

When you sell your house, your mortgage company will immediately receive whatever amount is left on your mortgage. If you have a home equity line of credit, you will be paying that off as well. Depending on how much is left in your mortgage, it may make a significant dent in the amount you will receive from selling the house.

If you happen to be in a situation in which the value of your home is less than the amount of the mortgage and any home equity loan, then you will be short-selling your house. A short sale is a very complicated process, which is beyond the scope of this episode. If you are in this position, find out how it will affect you.

3) Paying taxes.

You may also have to pay capital-gains taxes on your house. What is a capital gain? Put simply, it is the profit that you are making from the sale of your house. If you bought your house for $300,000, and you sell it for $600,000, the difference of $300,000 is considered a capital gain. You will have to pay taxes on a portion of that profit. Capital gains are discussed in more detail in Episodes 16 and 94.

In this case, the timing of the sale is very important. You are allowed an exemption on $500,000 of capital gains if you are married at the time of the sale. However, if you are divorced when the sale happens, then you are only allowed to exempt $250,000 of the profit that you made.

So in the example above, you would pay zero capital gains tax if the house is sold while you are still legally married, but you would pay a 20% tax on $50,000 if you sell it while divorced. If you had an even larger profit on your house, selling while still married will save you even more money

The math involved with these costs is a bit difficult to understand, so here is an example. Let us say you sold your house for $1,000,000, and you originally paid $400,000. You still have $200,000 left on the mortgage. You will pay 10% in selling costs, which is $100,000. You will pay off the $200,000 mortgage. Then you will need to calculate your capital gains tax.

If you are still legally married at the time of the sale, you will only need to pay tax on $100,000, because the profit was $600,000 and the exemption will be $500,000. Since capital gains tax is 20%, you will pay $20,000 in tax.

However, if you are legally divorced at the time of the sale, you will pay tax on $350,000. Your exemption is only $250,000, so you are paying $70,000 in tax

This example shows that the actual money that you receive from selling your house will be quite a bit less than the value of the home. In this example, you will lose up to 37% of the value because of selling costs, taxes, and the mortgage.

Here is the reason this lesser amount is important: during divorce negotiations, a million-dollar home cannot be treated the same as a million dollars in a bank account or investment account. If your attorney is not doing this math for you, then you will need a specialist to help ensure that you do not make costly mistakes.

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