Dividing the family home in a divorce
Whats the best method of dividing the family home after a divorce?
Hey guys. It's Joe Gardiner here of Profy Finance and Wealth and today I've got a short article and video around how to split the family home after a marriage breakdown.
The importance of the family home
Now the family home is basically the key asset for many Aussie families, and thus we need to pay special care to it in how we work with it. Obviously it's where our family live, our kids have grown up, and it centers us within a community, school zones, friends etc.
So what are the best ways to divide a family home?
And what should one consider along the way?
So we'll go through some of the common scenarios, work through a few of the implications and considerations, and then put you in a better place to go away and make an informed decision.
Free resource to go with this article
If you do want to cut to the chase, there is a one-page download available. But by listening to this video you'll gain some of the insights, and then that tool will be able to help you even more. So stay tuned till the end and you'll get the full benefit of both of those resources.
1) Refinance Home and Pay out Ex-Partner
Now the first scenario is perhaps the most preferable, and that is that one party takes on the family home and pays out a share of what the house is worth to a departing party. Now this is preferable because it's potentially the least expensive option out of these other ones and it's the most clear-cut. It also enables you to make a fresh start, a clean break, if you like, with the departing partner. And it keeps your kids, of course, in the home in which they know and love, and in the zone and the community in which they are. So let's check out what you might need to put this in place.
- The first thing that will help you here is a formal valuation. Note that this is completely different from obtaining the real estate appraisal. So that's simply a real estate agent giving you a bit of an impression of what they think they can sell the house for, and that's not a registered valuer's report. Instead you will need to cough up about $500 to $700 to obtain that registered valuer's report, but it will give you a really stable foundation for assessing what the home's worth. You can then do a 50-50 split after working out how much the loan is, and 50-50 split of the equity thereafter.
- Mortgage advice from a mortgage broker: Now often one party, in order to pay up the other person, will need to readjust their mortgage and take out perhaps a chunk more debt in order to have that cash to go and pay out the partner. So when you look at that refinancing situation, you will need to establish if you're a credit-worthy borrower, do you have a clean credit history, and are you able to afford repayments on that new and potentially bigger amount.
- Now, of course, you may have potentially re-partnered at this stage, so with two incomes in the family you may now be in a position to afford that home loan. But that is a suitable situation because you won't be coughing up anymore stamp duty or any moving costs and the disruption there is minimal and you get the clean break, as well. So it is a very preferable situation.
2) Sell home and split sale proceeds with Ex-Partner
Secondly, this is probably the most expensive situation and that is to sell the family home and start over. As you know there, starting over will mean that you do get that clean break, but it comes at a couple of big expenses.
- The first is the sales cost of getting your home sold on the market, you're going to have the real estate agent, potentially an auctioneer, the whole marketing campaign of Internet, advertising hoardings etc. So you will have quite a few tens of thousands potentially around selling the home. You'll also potentially want to put your sale proceeds, your half of that of course, towards buying a new property.
- And when you buy that new property, you'll be subject to stamp duty at the purchase. So this is going to be much more expensive from those two things.
- Key consideration: Now after you've take your share of the equity, you may not be able to afford a property in the same suburb. You might need to move completely from suburbs and school zones and communities that you're familiar with into another one. So it could be a really big change. And that's the reason why this is potentially the leasts desirable scenario.
3) Hold asset with Ex-Partner and sell later
The last scenario here, which is hold your home for the time being and divide it later, this is the 'treading water' scenario. And you might do this because it's too complicated to sort out at the moment, there might be some other things to work through. It could be that there's bad selling conditions in the market and you don't think you'll realize the best price on the asset. For instance, you could be in the middle of renovations.
- Continued ties: Now some of the things to think about here is you will have continued ties with the other party during this whole time to perhaps pay a constant share of the mortgage to keep that ticking over and for the maintenance of the property too. So there will be a period of continued ties.
- Tax: Now family homes aren't subject to capital gains tax, that's essentially meaning that you can take out whatever profit that you make and bank that straight away for you, no tax payable. However, that concession ends after moving out of the property for up to six years. So if the departing party that's since moved out of that house, you don't want to be treading water in this situation too long because you will lose that tax concession. So that tax planning is something to bear in mind here.
- Binding legal agreement: And lastly, you'll want to have a binding legal agreement that gives some sense of the conditions that should be met for a sale to go ahead. Is it when both parties agree to sell? Is it when the market is performing in a certain way and you can achieve $X hundred thousand dollars? Is it when the renovations are completed?
- Just make sure that the key details around the agreement are documented and the basis on which you've made the decision to not sell for the time being are established so that therefore you can make an independent judgment later on.
The treading water scenario has a few advantages including the fact that you might be in a much better position after a little while to be able to buy your home in your own name. For instance, you can take advantage of this scenario: you've treaded water for long enough so that you can do a Buy out (Scenario 1 on this page) or you treaded water for long enough that you can now sell your home and start over (Scenario 2 on this page).
So this really unlocks the keys to the other scenarios.
Next steps: A 1-Page Tool to help you decide whats best for you
This is all summarized in a one-page checklist, which is available here on the website.
And that's available to you, just pop in your e-mail address and you'll get that download.
It's a really snappy little summary of the outcomes that you'll achieve, the pros and cons of the scenario, and the professionals that can help you navigate the complexities and help get this done for you.