As a certified divorce financial analyst who strives to provide clarity in decision making during the divorce process, here are three settlement pitfalls to watch for.
#1: House Poor
People don’t like being uprooted and often hesitate to inflict change on children who may already be upset from the divorce. Others are seriously attached to their house and likely invested a lot of work in it over the years. Nevertheless, many of the recently divorced ultimately find house payments difficult and the house itself difficult to maintain alone.
Your house may suddenly be too large and, depending on the situation, can produce a huge and unexpected taxable event such as capital gains when you sell it.
#2: Short-sightedness
All too often divorcing people focus on short-term issues and benefits rather than considering long-term effects of financial decisions. Some are so eager to end the marriage that they don’t even want to discuss the benefits and drawbacks of decisions.
Money decisions amid emotional turmoil almost always come with obvious pluses and hidden, eventual minuses. For example, if you keep the house and the equity but give up some substantially equal amount in a retirement plan account, you risk missing out on investment-return gains in your retirement accounts and lose that amount of savings for your retirement and your future.
Always consider the long-term and the likely what-ifs.
#3: Real Costs
Maybe you simply have to keep that rental home. Or maybe you want your favorite investments in the settlement. You’re likely looking at the current value of the investment, without considering costs of liquidation.
For example, if you receive the rental home and eventually sell it, you might pay capital gains and depreciation recapture, a sort of past-due for tax breaks you take for wear on the property through years and which can amount to a sizable tax bite. You may also pay realtor fees and general sales expenses.
Always calculate the cost of eventually selling or disposing of an asset that’s part of a marital settlement.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
This article was prepared by FMeX.
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