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Expenses of the Family Home During Separation (and Occupational Rent)

When a couple separates, one spouse usually continues to live in the family home while the other person moves out. How will house-related expenditures be shared until the separation agreement is finalized? Based on each spouse owning 50% of the home, here are some considerations.

First, this article is presented to help you decide who pays what in a fair way.  It is intended as financial advice, not legal advice. You should speak to a legal professional to determine the applicability in your case of any issues discussed here.

The person resident in the home will want to ensure that all utility bills are paid; it is good to keep heat and lights on.  In addition, both parties will want to protect the value of the home, especially if they plan to sell it.   That means mortgage, property taxes, repair bills and insurance must be paid.

Meanwhile, the person who has moved out (the “non-resident spouse”) is likely paying rent for an apartment, or perhaps sharing costs while living with friends or relatives.  It would not be fair to the non-resident spouse to be required to pay for the operating costs of two homes.  On the other hand, if they still own 50% of the house, it is in their interest to keep the mortgage paid!

How should the costs of the household be shared to be fair to both parties?

Creativity and flexibility to deal with these costs are critical, giving consideration to the circumstances of each particular case. Here are some things to consider:

  1. The person who has moved out will be paying rent (or mortgage payments), including utilities, of their new accommodations. Therefore, the person remaining in the family home would likely be expected to pay the operating costs of the marital home if they still live there.  Such costs would include heat, electricity, water and sewer, lawn mowing/snow clearing and perhaps minor repair bills.  These items would be similar to those being paid by the spouse now living elsewhere (some of which may be included in their rent).
  2. The mortgage payment relates to ownership of the house.  If the home is going to be sold, and if the parties still jointly own the home, the payment should be shared equally because each of them will share the selling price of the property.  If the person living in the home is keeping it, then they should pay all costs.  Often, until the separation agreement is finalized, one cannot be certain about the final disposition of the home. In such a case, maybe mortgage payments should be shared equally until final decisions are reached.  If the house is sold as part of the separation agreement, then each party would receive 50% of the net sales proceeds. However, what if one spouse receives full ownership as part of the equalization settlement? In that case, mortgage payments made subsequent to the separation date by the new owner were 100% for their benefit. This is because all of the future growth in equity of the property will accrue to that person. Hence, if the other spouse paid a share of the mortgage payment after separation, he/she should be reimbursed by the spouse keeping the home.
  3. Property taxes relate to ownership of the home. Insurance is primarily related to protection of the home’s value. For this reason, I believe property taxes and insurance should be also shared in the same way as the mortgage payment. Adjustments would be made, if necessary, if one spouse keeps the home permanently. This is the same treatment as for mortgage payments. (Caution – sometimes the mortgage payment includes the property taxes – do not count it twice). Differences of opinion exist with respect to these expenditures. In particular, some advisors recommend that insurance should be paid by the person in the home as part of their operating expenses.
  4. Major repairs and home renovations improve or protect the value of the home for both parties, and should also be shared equally (i.e. treated the same as the mortgage payment discussed above). This includes any fix-up costs to prepare the property for sale as part of the separation agreement.
  5. What about “occupational rent?” The person living in the family home is occupying one-half of the property owned by the other spouse.  If you lived in an apartment, you would be expected to pay your utilities, such as electricity.  This is comparable to paying the operating costs of the home. However, in an apartment, you are expected to pay rent in addition to your utilities. This extra portion of the rent is to cover other costs paid by the landlord, including the down payment for the original purchase of the property, the mortgage, property taxes and building insurance.  Rent also provides the landlord with a markup for profit. I will call these the “markups.”  For the person remaining in the family home, their ex-spouse is a 50% landlord – because the ex-spouse still owns one-half of the house. The resident spouse is living in a home owned 50% by themselves and 50% by their ex-spouse.  If the non-resident spouse still owns 50% of the property, and is still paying one-half of the mortgage payment and property taxes, that is no different than renting from an independent landlord.  In addition, the non-resident spouse is paying rent and utilities to an unrelated person, which includes the above markups, while the spouse still living in the home avoids the markups.  To be truly fair, the non-resident spouse should be entitled to a fair rent, including the markups, on their 50% share of the property.  In that way, both spouses would be paying fair rent for their living accommodations. This particular amount is called “occupational rent” – rent to be paid by the person “occupying” the home.  I understand that courts consider various factors in deciding if and how much occupational rent should be paid. These include the individual financial circumstances of each party; where the children are living; the importance of having the home occupied to protect its selling value; balancing of other financial issues in the case; whether anyone has requested such rent; ensuring justice and equity to the parties; and other factors. In many cases, occupational rent is ignored in consideration of these factors. If paid, the rent would logically be 50% of the fair market rent based on the rental value of the home. However, given the particular circumstances, other considerations may come into play. Separations always include some “give and take.” For example, there may be financial adjustments to how other assets are to be divided, or how support payments are determined, or who is picking up the children, etc. Sometimes occupational rent is waived by the non-resident spouse. Other times, the resident spouse may pay 100% (instead of 50%) of the mortgage payment as a reasonable estimate of occupational rent. This latter approach simplifies the calculations significantly.
  6. Typically, occupational rent is a cost sharing arrangement pending finalization of the separation, and there is no profit motive to the rent collection. Hence, there should no income tax considerations to someone receiving such rent.  However, if there is a reasonable expectation of profit, then the Canada Revenue Agency will want to know.
  7. Sometimes the person occupying the home will take in a tenant, e.g. rent the basement, to help with finances.  This rent will typically be shareable in the same way as mortgage payments and property taxes (after deducting any specific expenses incurred related to the rent).  This type of rent may also need to reported on your tax return(s), depending on whether there is a profit intention or if it is just a sharing of out-of-pocket expenses.

As you likely now see, dealing with the family home is yet another complex area for negotiation in your separation process. However, keeping track of all of your payments and keeping all of your receipts (and mortgage statements) related to the home will be important.

By the time you reach your final property settlement, both parties have likely each made many payments related to family assets, debts and child custody. You will be anxious to sign the documents, and move forward. However, ensure you have only paid a reasonable share of post-separation expenses before you sign the agreement. A lawyer’s recommendation to forget about any imbalance could be costly. Maybe the difference is small or maybe it is big – and maybe you are willing to forget about the differences in any case, especially given the high costs of professional fees. However, as a financial planner, I would suggest you should at least know approximately the amount to which you are agreeing. It is easy for someone else to tell you it is not worth the hassle to figure out the numbers, but only you can decide if $1,000, $5,000 or $20,000, for example, are significant amounts.

Finally, if you plan to keep the home, make sure it fits into your budget. It is a very costly investment at a time when you very likely need to adjust your lifestyle for lower cash flow. Can you afford the mortgage and the maintenance costs, and still have enough money for other living expenses? The wise choice is usually to look at other housing options for financial purposes; emotional decisions do not pay the bills. Talk to a financial divorce professional to help with the numbers, or perhaps a local credit counselling or family services centre to help you prepare a personal budget.  Such counselling services may be free or much less expensive.  Use your legal counsel to understand your rights and options.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum