How to Navigate Your Divorce Settlement Options Related to the House

Figure out how much the house is worth

Whether you sell the house or agree to a buyout, you’ll have to find out how much your property is currently worth.

To coordinate a buyout, courts typically require a professional home appraisal to determine a home’s fair market value in a divorce. They need an official opinion of value to decide what’s owed to the spouse who’s selling their stake.

If both spouses order separate appraisals and the appraised values aren’t the same, a judge may be called in to make a decision or compromise.

Note: This can happen in less amicable divorces when the person buying the home wants the lowest appraisal possible to mitigate what they owe, while the person selling their share is motivated to get the highest appraisal possible to maximize what they’ll receive.

Alternatively, if you’re putting the house on the market, you may only need a comparative market analysis from your real estate agent to set a list price. However, if you and your ex-spouse can’t agree on an asking price, a home appraisal may be necessary to break a stalemate.

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Don’t insist on keeping the house unless you can afford it

You might feel emotionally compelled to keep your home in a divorce, but you should take a hard look at your finances to see if you can comfortably afford to carry the load on your own.

Not only will you need to buy out your partner and qualify for a refinance with your own financials and credit, but you’ll also need to shoulder the cost of maintenance and repairs moving forward.

San Diego-based family law and estate plan lawyer Michael C. McNeil urges his clients to think critically about finances and be conservative if they don’t have the funds to buy out their spouse.

“I usually counsel against taking out a larger loan to buy out the other spouse because incurring an even larger debt against a residence is often an unsound financial decision,” says McNeil. “This is especially so when the party buying the other out is also obligated to pay child and spousal support. Often, this has a severe impact on the buyer’s cash flow.”

If you’re the one leaving home, get your name off the mortgage

You might be the one leaving your marital home, but in the eyes of your mortgage lender, you’ll still be on the hook for payments.

Even if you file a quit claim deed and your settlement requires your ex-spouse to pay the mortgage, your name will be on it until the buyer refinances.

In addition to buying out your portion of the home, your spouse will need to refinance and be able to qualify for the loan on their own. Refinancing will likely come with a higher mortgage payment and adjusted interest rate for your spouse, since he or she will need to solely shoulder the entire cost of the remaining mortgage, as well as the cash-out refinancing owed to you.

While you’re at it, check in on the health of your existing mortgage, especially if you plan to go on and buy another house moving forward..

“Well over 50% of the divorcing couples or divorced couples that I’ve worked for have missed payments on their mortgage,” says Ray. “Even if they miss payments, they have the expectation or the understanding they can still buy their next house. And that may not be the case.”

It might seem overly complicated or a hassle to ask your spouse to refinance, but if you don’t, you’ll still be liable in the case that your partner defaults on the mortgage or falls behind on payments.

To remove your liability entirely from the mortgage, your spouse will need to refinance as the sole holder of the loan.

Agent commission negotiations can get messy

If either party in your divorce is looking to make a buyout, make sure you have your bases covered in regards to future agent commissions, which are typically 5-6% of the sale price of the home.

Sometimes the buying spouse will negotiate to have about half of the standard agent commission taken out from the agreed value in the home. Typically, this is done because the buyer will end up paying these fees in the future when the property sells.

If you or your spouse wants to sell your property soon, you should think twice about a buyout because you could end up paying for the fees out of your own share of the house rather than splitting it.

Think about the tax implications of your decision

Don’t forget to consider the tax implications of your various divorce settlement options.

The government allows married couples to exclude up to $500,000 of capital gains on their home sale while single filers can exclude up to $250,000. If you sell your house after getting divorced or remain married but change living situations, you could inadvertently increase your tax liability without proper planning.

That’s because you have to meet two criteria in order to qualify for the capital gains exclusion in a divorce:

• To pass the use test, the property has to be the principal residence of the seller for at least two of the past five years.
• To pass the ownership test, you must prove that you have owned your home for two of the last five years.

So say you sold your house in 2022 while you were still married to your spouse, and then you got divorced in January 2023. To qualify for the $500,000 joint tax break, at least one spouse has to pass the ownership test, both have to pass the use test, and you have to file a joint 2022 tax return for the year the house was sold.

However, if you’d sold the house in 2022, but you actually moved out long before that and no longer meet the use test, then the person living in the house may only be able to exclude the single filer capital gains limit of $250,000.

When in doubt, consult a skilled CPA or real estate attorney to navigate the tricky world of taxes.

Know your state’s property division laws

What state you live in might impact the way you want to handle property in the divorce settlement.

In a community property state, all property and income a person acquires during their marriage is classified as community property, which means it’s owned jointly by both spouses. However, anything a person comes into the marriage with, anything they acquire after the divorce, as well as any inheritances or gifts they’ve received at any time, are considered separate property.

There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. When you divorce in one of these states, community property is divided equally among both parties.

On the other hand, in an equitable distribution state, assets and property acquired during a marriage are divided fairly, “but not necessarily equally.” That might mean that you own a percent of the total value, but not necessarily an even half.

How does this impact the sale of your property?

If you and your ex-spouse bought property together in a community property state, you own the property equally and the proceeds would be split 50-50. If one of you purchased the home before marriage, then that person would be the sole beneficiary of the sale.

Depending on how your settlement shakes out in an equitable distribution state, you or your ex-spouse might own a more substantial portion of your home due to income contributions or family involvement. That could mean it’s easier to buy out their portion of the property, or vice versa. Or it could mean more or less proceeds in your pocket from the sale.

Think about what’s best for the family

Working through such an emotional process can be personally draining, but you also need to consider what’s best for the family overall.

Depending on your relationship with your ex-spouse, you might try a setup called “birdnesting.”. Birdnesting is the practice of allowing your kids to stay in the marital home, while you and your ex-spouse rotate out. This arrangement can lessen the trauma for children going through a divorce, though psychologists only recommend it for a short-term transition.

Some ex-spouses also choose to occupy another unit on their property, or rent nearby while the other spouse stays in the familial home. It might be unconventional, but sometimes what’s best for the family isn’t the most straightforward solution.

Divide up the items inside the house

Deciding what to do with your home post-divorce is the first step, but what about everything in it? Unfortunately, you can’t cut your mattress down the middle.

Consider creative avenues for property division

Just as no two relationships are alike, neither are two divorces. You don’t necessarily have to sell, buy out your spouse, or continue to hold the property. In some cases, you might decide to bargain using other assets.

Take, for example, a sizable 401(k). In a recent case, Arizona-area attorney Timothy Durkin represented a woman who wanted to remain in her marital home post-divorce but didn’t have the funds available to buy out the husband’s portion of the property.

“After vigorous negotiation, we were able to keep the wife in her home by offering the husband the entire 401(k) account as an offset,” says Durkin. “The husband was happy as he got approximately $10,000 more in value than he would have received if he had to split the net proceeds from the home sale.”

There’s no one right way to divide your property when it comes to a divorce settlement, but with the right resources, assistance, and considerations, you can make the best decision for you.

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