Divorcing Your Home
Whether your divorce is friendly and just the best thing to do for both of you – or it is a contentious situation and neither of you can talk without your attorneys present – or you are somewhere in between, if there’s a house involved, your situation just got a little, and sometimes, a lot more complicated. That’s why we put together this ‘Divorcing Your Home’ Guide. It is a simple guide to give you the most important facts on what you need to know when there is a house involved in the divorce.
Part I. Options to consider in a divorce when the home is owned by both parties together.
Sell the house and split the profit.
A. Selling the house before the divorce is final.
1. Takes one of the major causes of stress out of the divorce process.
2. Permits both parties to buy replacement residences before the courts interfere.
3. Splitting the proceeds.
a) It is a simple division of the proceeds, 50 – 50, unless the couple is separated and a relative or one partner has been making the mortgage payments. (See 5c)
b) Before the sales proceeds can be divided, the mortgage and any second mortgage or HELOC (Home Equity Line of Credit) will have to be paid. This will make final divorce court proceedings simpler. Real estate broker’s fees will also have to be paid.
c) Capital gains taxes might apply and would have to be paid. (See #6 Disadvantages.) However, if the couple remains married while selling, there might be as much as $500,000 capital-gains exclusion, depending on the tax laws at the time of sale.
4. What is the best procedure to follow?
a) Choose a Realtor who both parties are comfortable with.
b) It is advisable not to use a Realtor who is a friend or relative of either party.
c) Turn the decision as to the asking price over to the Realtor to prevent more conflict.
d) Prepare the house for sale by making minor repairs, freshen up paint and have the house cleaned. Remove clutter. If necessary, put things in storage to speed the process up.
e) If neither party is still living in the house, use a professional stager. Some Realtors are trained in this area.
f) If one spouse is still living in the house, he/she should be compensated for taking care of the preparation to sell. Both parties involved in the divorce should make this decision before going any further with sale of the real estate.
g) Accepting the buyer. It is possible that there will be more than one offer. The decision as to which buyer to choose must be made jointly. If it is a sticking point, ask for professional advice.
5. Who divides the money?
a) The money from the sale will be in escrow. The escrow company will pay off the mortgage and any second mortgages or liens.
b) Other joint marital debts (credit cards, loans, etc.) can also be paid off by the escrow company at the request of the parties involved.
c) If there has been a separation of spouses, and one spouse has been making mortgage payments on the house in question, it is possible that by reducing the principal owed, the equity in the house has risen. In that case, the spouse who had been making payments should get an adjustment to his/her distribution total, making the payout not completely equal. Example: Using round figures, one spouse has been making payments of $4500 a month on the mortgage, with $1,000 going toward the principal and $3500 toward the interest for the past year. That reduced the principal by $12,000 increasing the joint equity in the house. The spouse who has been making the payments could fairly ask for his/her share of the payout to be $12,000 more than that of the other spouse.
d) Once the amounts for all of the above are subtracted from the proceeds of the sale, the balance will be divided 50-50. The escrow company will make the two payments. The sale will be final. The profits shared. And the house will not be part of any divorce proceedings, making the divorce a much simpler process.
6. Disadvantages
a) If one or both spouses have lived in the house for a number of years, improvements most probably have been made. Therefore, when sold, the house usually gains in value from when it was purchased. According to the tax laws at the time, it is likely that capital-gains tax will be owed on any increase in value.
b) The value of the property will in all probability increase. Waiting to sell the house after the divorce is final adds time for the value to increase.
c) Fact: Divorce is stressful. Adding the high-pressure factor of selling a house just increases the stress factor.
d) Both parties involved in the divorce will have to find places to live as soon as the house sells; possibly much sooner than is preferable.
e) The couple’s mortgage could be under water. This means that the mortgage is higher than the value of the house. Selling at this time will mean that neither party will get any proceeds from the sale of the house. In fact, it will cost them.
Part II. Options to keeping the house in a divorce when the home is owned by both parties together.
Keeping the House
A. Both parties stay in the house.
1. Both parties would have to maintain separate lives while living under one roof.
2. This is especially helpful if the mortgage is upside down or there are financial problems. It gives the couple time to repair their finances and and/or bring down the principal on the mortgage before selling.
3. Disadvantage
a) Staying in the house together can put either or both parties in an uncomfortable position – conflict is almost inevitable.
B. Only one of the parties stays in the house.
1. This will only work if both parties can agree as to who will pay utilities; who is responsible for maintenance and the other party has a place to stay.
2. Use this alternative if you have yet to set a final date to put your house on the market.
3. This is another alternative that can add some stability for children who are caught in the middle of a traumatic divorce.
4. Once the children are grown, the couple can sell the home and split the profits.
5. It is wise to make sure that separation or divorce agreements include plans to sell the house at a later date.
6. Disadvantage
The spouse staying in the house may be neglectful in maintaining it which could lower the selling value of the home.
C. Buying the house from your spouse.
1. One of the parties becomes the sole owner by buying the other spouse’s share. The mortgage can be refinanced or the buyer spouse can get a new mortgage. Another method is to work out a payment plan. Legal help is definitely advised.
2. If you have emotional ties to the house or you have young children who need a stable environment, this could be your best option.
3. Once you buy-out your spouse, you will then be solely responsible for the mortgage, the maintenance and taxes.
4. Both parties should hire an appraiser to get a professional opinion as to the value of the property. Real estate professionals can also help in giving you a current assessment of market value. (Online estimates are not necessarily accurate.)
5. Disadvantages
a) If you have been dependent on your spouse’s paycheck to pay for these operational expenses, and you cannot afford to pay them on your own, this option is not the right one for you.
b) The buying spouse will have to qualify for the new or re-financed mortgage. Showing enough income can be difficult since only one income will be considered. Of course, if you have enough cash in hand this could be a moot point.
c) The selling spouse will still have the mortgage debt on his/her credit record which could make it more difficult to buy another property (until the mortgage is paid off in full).
D. Renting the home in question to a third party.
1. Another answer as to what to do about the house is to rent it to a third party.
2. This option lets you continue to increase the equity in your house (very helpful in an upside-down mortgage) while living in a new residence.
3. Since the house generally can be rented for more than the monthly mortgage payment and cover utilities and maintenance, there might be some excess dollars.
4. It would be wise to have a property management firm handle the rental. This will give you peace of mind. A good property manager will assure that tenants are approved, repairs are made and potential damages are repaired and paid for so as not to lower your property value.
5. Disadvantages
a) Rental leases and who is going to pay for utilities and maintenance, etc. have to be put in writing and both spouses must agree and sign the legal papers.
b) The mortgage debt will still be listed on both parties’ credit records.
E. One spouse at a time
1. This is a unique alternative to selling a home in a divorce, although not unheard of and applies only if there are children involved.
2. The house remains as the children’s residence while the parents each retain other places of residence.
3. The parents alternate living with the children (weekly/monthly basis), returning to their own new residence when their turn is up. It’s the reverse of children being shuttled to different parents each week in a divorce and is a better solution for children instead of shuffling them off to a different house every week.
4. Both parties split the expenses and appropriate tax deductions for the mortgage, maintenance, utilities, etc.
5. Disadvantages
a) The high cost for each spouse to pay 50% of the marital home plus 100% of an individual new residence puts this arrangement more out of reach financially than any of the other alternatives.
b) Each parent is under a great deal of stress as they alternate living quarters on a regular basis. However, this disadvantage is outweighed by there being much less stress for the children.
Part III. Options when considering a divorce and the marital home is owned by one spouse.
When the house is in only one name.
A. Sell the house before you are legally separated or file for divorce.
1. Once you are legally separated or file for divorce, all property owned separately by you or your spouse, along with all property owned by you and your spouse together becomes part of the divorce proceedings. Selling the house before these legal procedures are in effect, removes the house from the divorce proceedings.
2. If you and your spouse are on friendly terms, determine whether you are going to keep your home, or if one of you is going to buy the other out, or if you are going to sell the home. If one of you is going to buy the other out, put all the numbers on paper to make sure the refinancing of the mortgage is affordable. Check with a mortgage broker, a Realtor, your CPA/accountant, and a tax attorney too.
3. This will also prevent the most emotional, complicated part of any divorce proceedings – the selling of a house you have lived in together.
4. Consult with a divorce attorney. Once you file for divorce, the laws are very strict as to what you can keep and what belongs to your spouse, what you can sell, and how property is divided. A divorce attorney can help you understand your legal rights and protect you from doing something unwise.
5. You have already started divorce proceedings.
a) The court will issue a temporary order preventing you and/or your spouse from transferring ownership of property and all other assets to another party.
b) Your home, that you both lived in together, is still part of the divorce whether or not your spouse’s name is on the title or deed or ownership papers.
6. Definition of separate property.
a) What constitutes separate property: Property that you bring with you when you entered into the marriage and you keep in your name.
b) Separate property also includes gifts and inheritances.
c) In some states, divorce proceedings allow for the division of separate and marital property; with the origin of the property taken into consideration.
7. Definition of marital property.
a) The state you live in determines what is marital or community property.
b) Generally, marital or community property is that which is acquired during the marriage including work income, pensions, real estate, furniture, and personal property.
c) Marital or community property does not include individual gifts and inheritances.
d) It does, however, include your house.
8. Community property state or equitable distribution state.
a) In a community property state, the marital property is divided equally. Each party gets 50% of the property or its value.
b) The opposite of a community property state is called an equitable distribution state. In this situation, the divorce court divides the property as it determines to be valid, fair and equitable.
Above all else, whether you own your home together, or only one of you is on the title/mortgage, make divorce and the decisions about your home by using your head, not your heart. Treat the sale of your house as a business decision.