With roughly 700,000 divorces nationwide each year, you’re not alone in splitting from a partner — or in deciding how what once was “ours” gets allocated into “yours” and “mine.”
Dividing real estate in a divorce adds stress to an already stressful life event because property, especially purchased together, forms part of the foundation of a relationship.
“It’s stability. It’s security, feeling like you’re going to be OK because you have a roof over your head,” said David Dorman, a top real estate agent in the Orlando, Florida area, who regularly helps divorcing clients with their property needs.
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Although divorce laws vary by state, real estate and financial experts say that there are three main ways property gets divided in a divorce:
- Both parties sell it and split the equity
- One party buys out the other
- Both parties agree to defer a sale until a later date
Here, we’ve gathered insights into the top considerations for each route.
Option 1: Sell the house and split the equity
Dividing the sale proceeds equitably for all parties can help cover the down payment on a new home, assist an ex with relocating, and grant both of you a clean slate. That sounds simple — provided the house is marital property.
“If one person bought the house before the marriage, that might not even be on the table,” said Shawn Leamon, a certified financial analyst in Dallas, Texas, who specializes in divorce matters and hosts the popular podcast “Divorce and Your Money.”
Most states are “common law property states,” meaning that a property acquired during a marriage is completely and solely owned by the spouse who earned it unless the title or deed is in the names of both people.
California, Arizona, New Mexico, Nevada, Idaho, Washington, Texas, Wisconsin, and Louisiana are “community property” states, meaning that all assets — and debts — acquired during the marriage belong equally to both spouses. Any assets acquired before the marriage are considered separate property unless a spouse transfers a title to the other spouse.
A judge can order a divorcing couple to sell a house to cover outstanding debts and other expenses, in which case you’d both be left with less equity to divide. Also, depending on your state’s property and homestead laws, you might have a situation where you’re divvying up just a percentage of the house’s proceeds. For instance, you owned the house before marriage, but both of you contributed to renovations.
“It’s not a fifty-fifty thing,” Dorman noted.
If the home sale proceeds are part of your divorce settlement, you may not be able to finalize the divorce until the house sells.
Considerations for this route:
- Think of your house not as a physical structure but as one piece of your entire financial picture. “It’s just numbers on a piece of paper,” Leamon said. “You’re looking at the whole picture and coming up with who gets what money. How you get to that is up to you.”
- Get a professional home appraisal so both you and your ex know what the house is worth and what it is likely to fetch on the market.
- Consult with your divorce attorneys about what assets are available, what you think you’re owed, and how to arrive at an amenable solution. If you need to divide, say, one-quarter of a renovated bedroom, perhaps you can reach a compromise by trading other assets, such as money from a retirement fund, Leamon said.
- Speak to a real estate agent or an attorney who can prepare a preliminary closing statement and walk you through what’s available to divide after closing if the house sells at a particular price. People tend to forget that selling a home involves additional costs such as title insurance and HOA transfer fees, and divorce tends to muddy who pays for these.
“You need to be really specific about who pays for what and how it’s distributed,” Dorman said. “But you don’t want to be talking in hypothetical numbers.”
Option 2: One party buys out the other
A buyout typically coincides with refinancing the original mortgage loan. The ex who wants to buy the home applies for a new loan in their name, borrowing enough money to pay off the previous loan and the other spouse what’s owed.
However, a key question that arises is whether whoever keeps the house can afford to refinance it. “Many people should talk to a mortgage lender sooner than later,” Leamon said. “That can have a very big influence on your options.”
If the ex who wants to keep the house has worked only part-time or not at all, a lender might not find that income level sufficient. “A lot of people start off where they want to buy the other one out, and they realize they can’t do it, and end up selling anyway,” Dorman said.
Considerations for this route:
- Talk with a mortgage lender about whether refinancing is feasible for the ex who intends to remain in the house.
- Work with an agent who has experience helping divorcing clients. Agents with the Divorce Specialist designation will be well-versed in handling the added communication, property division laws, emotional conflict, and other complexities of divorce home sales.
- Whoever plans to move out should speak with a real estate agent to gauge what they can reasonably afford, Leamon added.
- Let your divorce attorneys or real estate attorneys review the agreement specifying how each party will be paid.
As to the last point, Dorman worked with a couple divorcing amicably and handled the divorce themselves. The ex-wife bought out the ex-husband, then later decided to sell the house. However, based on language in the divorce decree, the attorney for the title company said the ex-husband was owed additional money.
“It almost held up closing,” said Dorman. “Luckily, the attorney was able to draw up an addendum, and the husband and ex-wife were friends enough to have him sign a waiver saying that he’d already received his money.”
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Option 3: Own the house together for now, then sell it at a later date
Although unusual, this occurs when both parties agree to sell the home at a point in the future because to do so now would cause too much upheaval. Perhaps they have children and decide to sell once the children are finished with school, which would make for a more natural transition. “They put it into their settlement paperwork,” Leamon said. “It makes more sense from a life perspective.”
Be sure that whoever pays the mortgage doesn’t miss a payment, which could affect both of you down the line.
You’ll also want to weigh how this decision will impact your ability to qualify for the capital gains tax exclusion when the time comes to sell your house. You and your spouse can each exclude the first $250,000 of gain from the sale of your home provided that you meet the “ownership test” (both people own the house) and the “use test” (that you lived at the house for two of the five years before the sale) regardless of your marital status.
The trouble is, assuming one spouse plans to move out despite the co-ownership arrangement, whoever leaves the home and no longer uses it as their primary residence could lose out on their portion of the gain exclusion when the time does come to sell, effectively cutting the exclusion from $500,000 to $250,000.
Considerations:
- Consult with an attorney to outline specifically how the mortgage will be handled while the property is in both names and when to remove your ex from the mortgage. “A lot of times, that’s done just by changing the deed over to a quitclaim deed, but you need to make sure that’s done right as well,” Dorman said.
- You may also need the help of a tax specialist with divorce expertise who can explain the impact of mortgage interest and capital gains taxes if you sell before your divorce or at a later date.
However you divide what was your marital home, know that the professionals in your corner don’t have an emotional stake in the situation. They’re there to assist you so that you and your ex can look at the benefits and drawbacks of each option and decide the best way to end this chapter and begin a new one.
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