What Happens to the House in a Divorce?
When going through a divorce, one of the most significant decisions to make is what happens to the marital home. While selling the house is a common choice, it’s not the only option available. Below are some alternatives, tips for navigating the process, and key considerations to keep in mind when determining the best route.
Key Takeaways:
Options for handling the house in a divorce:
Dividing large assets — one person keeps the home, the other takes other assets.
Buyout — one spouse buys the other out of the property.
Co-owning the property.
Selling the home and splitting the proceeds.
Who Gets the House in a Divorce?
When divorcing, spouses are required to divide their assets, including the marital home. How the house is handled depends on factors like when it was purchased and which state you live in.
State laws only come into play if the case goes to court. If both spouses can agree on terms outside of court, they have the flexibility to decide what works best for both of them.
Marital vs. Separate Property
Marital Property: This includes anything acquired or earned during the marriage. Examples include income, cars, and the home purchased together.
Separate Property: This belongs to only one spouse. The home may be considered separate property if it was owned before the marriage or if one spouse’s name is on the deed and the property hasn’t been mixed with marital assets.
Community Property States
In a community property state, almost everything acquired during the marriage is split equally between both spouses. This includes assets like income and property, but there are exceptions such as property owned before the marriage.
If one spouse bought the home before marriage and the other’s name was never added to the title, the house may remain separate property. However, the appreciating value of the house during the marriage may be divided.
States with Community Property Laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska allows couples to opt into community property.
Equitable Distribution States
In equitable distribution states, property isn’t necessarily divided 50/50. Instead, the judge considers factors like income, financial contributions, and earning potential when deciding how assets will be divided.
Prenuptial (or Postnuptial) Agreements
A prenuptial (before marriage) or postnuptial (after marriage) agreement outlines which spouse gets which assets and responsibilities in the event of a divorce. These agreements override state laws, whether you live in a community property state or equitable distribution state.
Options for the Marital Home During Divorce
When deciding what to do with a home during a divorce, there are several options to consider.
Option 1: Divide Large Assets
If there are other large assets—like a vacation property, cars, or a stock portfolio—couples may agree to divide the assets equally, with each person receiving assets of equal value. For example, one spouse may keep the family home, while the other receives other assets.
Why Choose This Option? This method can help finalize a divorce faster, as it avoids the need to sell the house or argue over who gets a larger share of its appreciation.
Keep in Mind: All assets must be valued to reach an equitable division.
Option 2: Buyout the Other Party
If one spouse wishes to keep the family home, they can buy out the other spouse's share. This involves paying half the current market value of the house.
Why Choose This Option? This is ideal if one spouse wants to stay in the home, particularly to provide stability for children, or if selling the home would result in a financial loss due to market conditions.
Keep in Mind: The buying spouse must have access to enough cash to pay for the buyout, which may require refinancing the home.
Option 3: Co-own the Property
In some cases, divorcing couples choose to continue owning the home together. They may decide to split the mortgage payments and agree on when the house will eventually be sold.
Why Choose This Option? This option allows children to remain in the family home while both parents share the costs.
Keep in Mind: Both spouses must continue to make timely mortgage payments to protect their credit. Additionally, tax implications may arise when the property is sold.
Option 4: Sell the Marital Home
A common choice for divorcing couples is to sell the home and split the proceeds. This can provide each spouse with a cash sum to help with the next chapter.
Why Choose This Option? Selling the house offers a clean break and helps both parties avoid potential future disputes. The proceeds can be used for moving costs, legal fees, or finding new homes.
Keep in Mind: If the home hasn’t been owned for at least two years, capital gains taxes may be owed on the sale profit.
Negotiating the Sale of the Marital Home
Selling a home requires a lot of cooperation, and divorcing couples need to come to an agreement on various factors, including:
Home Improvements: Decide if any improvements will be made before selling or if the house will be sold as-is.
Hiring an Agent: Agree on a real estate agent who will help sell the house.
Costs of Marketing: Split the cost of professional photography, staging, and online listings.
Sale Price: Agree on the listing price for the home. This can affect other aspects of the divorce settlement.
Investor Purchase: If a quick sale is needed, selling to an investor may be a viable option.
Tax Implications of Selling the Marital Home
The main tax concern when selling a home is capital gains taxes. These taxes are based on the profit made from the sale. However, there’s a tax exclusion for primary residences:
If you've lived in the home for at least two of the past five years, you can exclude up to $250,000 (single) or $500,000 (married) of the profit from the sale.
Timing the Sale
There are key factors to consider when timing the sale of a marital home:
Sell During a Seller’s Market: Sell when there are many buyers and few homes available to maximize profit.
Sell in Spring: The spring market is traditionally the best time to sell.
Sell Before a Divorce is Finalized: If both parties agree, selling the home before the divorce is finalized can simplify the process.
Final Thoughts
Deciding what to do with the family home during a divorce depends on various factors, including personal goals, financial situations, and the emotional impact. Whether you choose to sell, co-own, or buy out your spouse, it's crucial to consult with a professional to ensure you make the best decision for your circumstances.
