Women (or men) who are getting divorced may crave the stability of retaining the family home but they owe it to themselves to study other divorce settlement options -- especially if they’re the lower wage earner or a no-wage earner.
Cheryl Glazer, who runs a divorce and financial transitions consulting practice in Wynnewood, Pa., and is president of the Association of Divorce Financial Planners, has long encouraged clients to look more objectively at their houses. Provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) make this exercise even more pertinent, said Glazer, who holds a master’s degree in taxation.
“A home is a living thing,” she said. “It’s not just a museum piece and it doesn’t sit behind glass.”
Homeowners must consider the out-of-pocket expenses associated with maintenance, repairs and updates, she said. They should also review their insurance policy terms, she said, and crunch the numbers on their property taxes and possible mortgage payments.
The 2017 tax law lowered the federal deductions that can be taken on state and local taxes to $10,000. That barely makes a dent in the property taxes for homes in some communities. Homeowners can deduct the interest paid on new loans of up to $750,000 of debt; old loans are grandfathered at $1 million.
The new tax law also limits when interest is deductible on home equity loans. It’s still deductible if the loans are used for additions and improvements to an existing home or for a bridge transaction when selling one home and buying another. However, the interest is no longer deductible if home equity loans are used for personal expenses. This includes buying a vehicle, paying a child’s college tuition or buying out a spouse, said Glazer.
Individuals embarking on a change in social status also need to familiarize themselves with other potential tax hazards from the new tax law. For example, alimony payers may have to be “dragged kicking and screaming,” she said, because the new law eliminates their deductions for alimony payments. Rather than owning a house, a spouse with little income may be better off living somewhere that’s more financially fluid, she said.
(You can meet Glazer during the “Biggest Risks for Divorcing Clients” session at FA’s Invest in Women Conference.)
Women can become very emotionally attached to their houses and identify a house as “a piece of themself,” said Glazer, especially if they picked out all the cabinets and finishes, raised their family there and marked their children’s growth on a doorframe. But the permanence of a family house shouldn’t supersede retirement security, she cautioned.
It’s reasonable to expect retirement assets in a stock portfolio to appreciate over 10 to 15 years, she said, but property values can decline. Real estate in some regions hasn’t rebounded from the 2008 recession. Higher interest rates (although the Fed is in pause mode) and the diminished deduction for property taxes could also reduce home values.