For many couples, the marital home is their primary asset. When a couple divorces, deciding what to do with that home then becomes a significant decision.
While the options for dividing a home during divorce may seem complicated, in reality there are only a few options.
Selling the House and Dividing any Profits (or losses) is generally the easiest approach from a financial and transactional standpoint. Other considerations, such as maintaining stability for kids or keeping kids in the same school district, may prevent this from being a good option however. If you or your soon-to-be ex want to keep the home, be very clear on the reasons for doing so.
If you and your soon-to-be ex choose to sell the marital home, you will need to select a single realtor. The realtor should be a neutral third party who will look out for your common best interests. Hopefully those common interests are to sell the home as quickly as possible, for the best price possible. Communication with the realtor is critical – make sure discussions are summarized in writing and key decisions are documented. Be sure to set guidelines with your realtor and your spouse around the minimum acceptable sale price, scheduling showings, etc. Before selecting a realtor, ask about their experience working with divorcing couples.
If you have already filed for divorce, then you must have approval from the court before selling the home.
Another option is for One Spouse to Buy Out the Other. In this case, it is necessary for the “departing” spouse – the one who will no longer own the home – to be removed from the mortgage through a refinance. Yes, that is a necessary step! This is very important and often misunderstood. The divorce settlement agreement awarding the property to one person is in effect a “Quit Claim Deed” which removes a party from the title of a residential property. However, a Quit Claim Deed does NOT remove a party from the mortgage. This party continues to be obligated on the mortgage until they are refinanced off the loan.
There are several ways to complete a buyout:
- Cash Out Refinance
- Equity Buy Out Refinance
- Swap some or all of the equity in the home for another asset
Often during a divorce, cash is a desirable, but scarce thing. One way to find more cash is to pull cash out of the equity of the home. A Cash Out Refinance can be done to provide cash to both spouses. Alternatively, an Equity Buy Out Refinance can be done to award cash to the “departing” spouse only. In both cases, the new mortgage is in the name of the retaining spouse only.
Another alternative is to award the equity in the home to one party in exchange for awarding equivalent equity of another asset to the other party. For example, one party keeps the equity in the home while the other keeps a joint investment account of equivalent value.
The third option is for both spouses to remain as co-owners of the home. This can be very complicated for a divorcing couple as they are essentially entering a business partnership and therefore must agree on key terms. Key terms to consider are:
- When will the home be sold?
- How will you divide profits/losses?
- What happens if the spouse who continues to live in the house re-marries?
- Who is responsible for paying for maintenance of the home?
- How are decisions made regarding what maintenance activities are necessary and/or should be completed?
It is important that all terms be very specific to prevent confusion or additional trips to the attorney or court in the future.
The ability to take advantage of the Capital Gains Exclusion is a consideration when deciding whether or not to continue co-owning the marital home after divorce, particularly when the value of the home is expected to increase. This can be a big deal from a financial standpoint as the Capital Gains Exclusion is $250,000 for a single person but $500,000 for married people (or $250,000 per person). If the ex-spouses meet the IRS Ownership and Use criteria, then both parties are eligible to take advantage of the Capital Gains Exclusion at the eventual sale of the property.
- Ownership: You owned the home for at least 2 years and you are on the title
- Use: You used the home as your primary residence for the preceding two years OR as your primary residence during the marriage
This can get complicated, especially if the spouse living in the home remarries. Talk to a tax professional to understand the specific implications for you.
There are tax implications to all financial decisions made during divorce, including what is done with the house. Often what seems like an equitable division of property on the surface is not in reality once the tax implications are included. Be sure to work with a tax professional and/or a Certified Divorce Financial Analyst to help work through these implications, specific to your situation.
If you are divorcing and have an existing mortgage or want to buy a new home, talk to a mortgage lender – preferably a Certified Divorce Lending Professional® – early in the divorce process.
A Certified Divorce Lending Professional® (or CDLP) has special training and expertise to navigate the complicated intersection of mortgage lending, real property laws and tax codes. CDLPs work with attorneys or financial advisors and their clients to:
- Identify the options for and implications of dividing residential real estate
- Identify divorce settlement agreement elements necessary to support future residential real estate financing needs
- Manage post settlement residential property transactions
A CDLP can help you and your attorney or financial advisor make decisions about existing residential real estate and prepare you for future residential real estate financing needs. Your goals for future home ownership are critical to understand early in the divorce process so your attorney can help craft a settlement that supports those goals. However, attorneys and financial advisors are not experts at mortgage financing, the same way loan officers are aren’t experts on the law or financial planning, and a CDLP can step in to provide that expertise and detailed recommendations specific to your mortgage situation and goals.
Even if you did not engage a CDLP during the divorce process, one can help you after the divorce as well. Their additional training will help ensure a smooth process for a refinance or a purchase.
Start smart! Engage a Certified Divorce Lending Professional as part of your team to help you understand your options, make decisions, and be prepared for a new financial future.
All loans subject to credit approval. Rates and fees subject to change. Mortgage financing provided by PrimeLending, a PlainsCapital Company. Equal Housing Lender. © 2016 PrimeLending, a PlainsCapital Company. PrimeLending, a PlainsCapital Company (NMLS: 13649) is a wholly owned subsidiary of a state-chartered bank and is an exempt lender in TX. V010116.