Going through a divorce is never fun. It’s often accompanied by a lot of emotions and hurt feelings. On top of that, there are a lot of financial matters to sort out, including what happens to the house.
In this post, we’ll go over what your options are when it comes to handling real estate property after a divorce. So if you’re one of the nearly 700,000 people who get divorced each year, this article is for you!
Of course, divorce laws vary by state, so your options may be slightly different from what’s laid out here. But generally, you have three main options:
1. One spouse buys the other out
You and your ex may choose to have one person buy the other out. This gives one person full ownership of the house and releases the other from the responsibility to help pay for the mortgage.
Typically, this route involves refinancing the mortgage. The person who wants to keep the house must get a new loan to pay off the previous loan and whatever the other spouse is owed.
For example, if the couple together owns $100,000 in equity in the home, the person keeping the home must pay the other $50,000.
Keep in mind that the person keeping the home will need to be able to afford the new mortgage on their own. So they should talk to a mortgage lender who will tell them if this is possible, given their personal debt-to-income (DTI) ratio, income, credit score, and other factors.
In addition to refinancing the mortgage, you may also need to remove one spouse from the title via a quitclaim deed. Consult a family law attorney who can help you do this. They can also review the divorce agreement to ensure both parties are treated fairly.
Finally, If you are the one selling your share of the house and planning to move, you’ll need to start looking for new housing options. This can take time, so it’s best to get an early start.
2. Sell the house and split the profits
Another option is to sell the house and split the profits with your ex. This can help provide a clean slate for both individuals, especially if both want to leave the house (and the memories associated with it) behind.
If neither person can afford the mortgage on their own, you may be forced to sell anyway. Or if you fail to meet the deadline to refinance under one spouse’s name, the court may order you to sell.
At this point, it’s important to note that most states are common law property states, which means the property belongs to only one person unless both names are on the title or deed.
Other states, however, are community property states (California, Arizona, Nevada, Louisiana, Idaho, New Mexico, Washington, Texas, and Wisconsin), which means all property acquired during the marriage belongs to both spouses. Only property acquired before the marriage belongs exclusively to the original owner (unless a spouse was added to the title afterward, of course). If you’re wondering, “Is Florida a community property state?” the answer is no, as it operates under common law property principles.
Assuming both spouses own the property, you must find a way to split the sale proceeds fairly.
First, get a house appraisal so you know what your home is worth and how much you can expect to sell it for. Make sure you and your ex agree to an appraiser. If you don’t, you can each choose your own appraiser and average their results.
Finally, don’t forget the capital gains tax implications of selling the property. Each spouse can deduct up to $250,000 from their taxable income. But this only works if the house was your primary residence for at least two of the last five years prior to the sale. Consult a tax specialist to make sure you don’t leave any money on the table.
3. Own the house together for now and sell it later
The last option we’ll mention is keeping the house and owning it together for now and selling it later. Though not as common, this route may be ideal for couples who want to put off the added stress of selling or refinancing the house or still have children at home and don’t want to disrupt their life any more than is necessary.
For example, you may choose to have one person move out while they still own part of the home. You can then wait to sell until all the kids are out of the house.
If you go this route, just make sure that you and your ex are clear about when you will sell the property and whether one party will be compensated somehow for not being able to live in the house while it is owned together. You will also want to be clear about who is responsible for paying the mortgage so that neither person’s credit is affected by a missed or late payment.
Deciding what to do with your property after a divorce can be hard. That’s why it’s important to have professional help along the way—from family lawyers, financial planners, mortgage brokers, and tax professionals.
By working together with your ex and the appropriate professionals, you’ll be better positioned to find a solution that suits both of you.