Divorcing spouses who own a house together must eventually decide how to divide one of their largest assets. There are several things that the court usually takes into consideration when determining who will receive ownership of real property. However, if the couple can come to an agreement between themselves about the house, in the vast majority of cases the judge will allow the agreement to stand. It is important to note that sometimes factors not addressed here will be determinative. As every situation is different, it is best to consult a knowledgeable divorce attorney to help you understand how the laws will apply in your specific situation.
What Happens to Our House?
There are generally three options for dealing with a shared house in a divorce:
1Put the house on the market
2Initiate a buyout, in which one spouse buys out the other
Valuing and Dividing the House
Typically, a court will begin with the presumption that the equity that the divorcing couple has in the house should be divided equally. Equity is determined by valuing the house and subtracting any amount still owed on the mortgage or other debts connected to the house. When evaluating a home’s value, divorcing spouses should strive for as up-to-date an evaluation as possible. This will probably mean hiring an agent, an appraiser, or another real estate expert to assess the house’s value rather than relying on older documents.
The Division of Equity
While most courts start with the presumption that the house’s equity should be divided equally, many factors can lead to an uneven split. Factors may include the laws of the state, whether any funds put into the house were one spouse’s separate property, and how the spouses’ other assets are ultimately divided.
A judge will most likely order the house sold and the proceeds divided, but each case is different. For instance, a judge who awards one spouse primary custody of the children may also award that spouse the home. A divorce attorney can advise divorcing spouses on how a judge in their jurisdiction may deal with the house, although spouses will have the most control over the division if they opt for a divorce settlement rather than going to trial.
Selling the House
Selling a marital home can be a difficult decision, especially for spouses with children or those who purchased it as their “forever home.” However, most divorcing spouses should at least consider selling their house during their divorce. There are many financial and practical reasons to sell a marital home, but spouses should also consider the emotional reasons. Selling the house may give both spouses much needed closure and greater financial resources to start anew.
A house is usually a couple’s largest asset, and the sale of a house can give divorcing spouses an appealing sum of money to divide. Keep in mind, however, that the sale of the house will have associated costs. Divorcing spouses will most likely benefit from hiring a real estate agent to manage the selling process and offer advice on key decisions, such as the asking price. Spouses will also need to decide whether the house needs repairs or other work before it can be shown and how those tasks will be accomplished and funded. Other costs may include paying any remaining mortgage balance, brokers’ fees, closing costs, and potential capital gains tax. Only what remains after the house is sold and these costs are paid will be split between the spouses.
Capital Gains Tax
Generally, spouses who file taxes jointly and sell their home together receive double the capital gains tax exclusion that a single homeowner would. Tax rules also change depending on whether the home is a primary residence and how long it was owned and occupied. A tax expert can help divorcing couples make the best decision for them.
Buying Out Your Spouse
Some divorcing spouses prefer a buyout over selling the home altogether. Often, this is because one spouse will assume primary custody of the children and wants to remain in the home. A buyout may also be appealing when it does not make financial sense to sell.
Some states do not allow spouses to account for potential future brokers’ fees in their buyout agreement.
Both spouses assume a risk in a buyout. The buying spouse risks that the value of the home may depreciate. They also may feel more financially strained, since the mortgage payment is likely to increase. The selling spouse risks that the value of the home may appreciate. After agreeing on the value of the house, spouses may negotiate adjustments to account for potential future brokers’ fees, housing repair costs, and other asset division offsets. If a buyout happens as part of a divorce, the selling spouse may not need to pay taxes on the money that they receive under a tax exemption for divorcing couples (although they should consult with a tax expert, especially if the buyout will happen over a long period of time).
Co-Owning the House
Divorcing spouses may wish to co-own their house instead of selling it or having one spouse buy it out. Co-owning the house often eventually evolves into buying out one ex-spouse or selling the house altogether.
Like a buyout, choosing to co-own a house may be advantageous for divorcing spouses with children living in the home or spouses who think that the house’s value will appreciate. However, spouses should consider that they will each remain responsible for the entirety of the mortgage, not only their half. This may make it difficult to make big purchases, including the purchase of another home. Furthermore, one ex-spouse’s late payment can damage the other’s credit score.
Mortgage Interest Deduction
Ex-spouses will need to investigate the tax rules regarding mortgage interest deductions for divorced spouses co-owning a home and agree on how to claim the deduction. A tax expert may be helpful in this situation.
Co-owning a house will likely involve detailed accounting and close interaction between ex-spouses. They will need to agree on any upkeep costs and how those costs will be divided. This may be especially concerning for large unexpected costs, such as water damage or roof repair. Spouses should keep in mind recurring costs too, such as home insurance, HOA fees, utilities, and property tax payments (if they are not rolled into the mortgage).
Ex-spouses who co-own a house will want to plan for the worst. If one ex-spouse dies, their ownership share of the house may not automatically transfer to the other ex-spouse. The ex-spouses thus should work out a clear plan for what will happen in the event that either of them dies. Ex-spouses are also not immune if the other ex-spouse is sued by creditors or files for bankruptcy. Both ex-spouses’ shares of the house will be at risk. Thus, co-owning a house may only make sense if ex-spouses continue to trust each other long after their marriage.
Spouses who intend their co-ownership to eventually evolve into a buyout or sale of the house altogether can specify this arrangement in their divorce settlement agreement. A written agreement concerning the future of the house will be important in preserving the capital gains exclusion when the house eventually changes hands. A tax expert can help develop a timeline for the buyout or sale that preserves the tax exclusion.