How to Divide the Marital Home during Divorce
When determining who gets the house in a divorce a house must be classified as marital or community property and not separate property. A judge can then award one spouse the marital home. This can be accomplished in one of four main techniques:
- Agree to a Buyout
- Give up Other Assets
- Take the Home Instead of Alimony
- Co-own the House
Often, the family home is the largest asset to be divided in a divorce. If you and your spouse are able to find common ground on what to do with the family home, it will simplify property negotiations significantly. In the following paragraphs, we will discuss the three most common ways to deal with the family house: selling, buyouts, joint ownership.
Sell the House
When one spouse can afford the home on his or her own or neither wants to stay in the house putting the house on the market is always an option. Things to remember:
- the mortgage needs to be paid off
- home equity lines of credit need to be paid
- capital gains tax will need to be paid
One of the main disadvantages of this method is the expenses you'll incur in the upkeep and the sale of the house. This is especially true if market conditions are not good for selling a house. Other than the expenses related to selling a home there are other disadvantages, typically overlooked or “hidden” costs associated with selling a house:
- hiring a real estate agent
- agreeing on an asking price
- paying for repairs and upgrades
Selling a home is never easy and it does not get easier during a divorce. This does not mean it is not the right decision based on your circumstances, but be aware of the decisions required before going down this path.
Agree to a Buyout
Another option available to deal with the family home during a divorce is to agree to a buyout or trade. This means the equity of the house will be paid to the spouse moving out of the marital home with other marital assets. A buyout is a great option when there are other assets to divide from the marital estate. Some things to consider before entering a buyout scenario:
- the buyer may end up paying too much if the house depreciates
- the seller may end up losing out on future appreciation of the property
Give up other Assets
The most common way to execute a buyout is by one spouse giving up other marital assets, such as retirement funds or investments. To execute a trade that is fair, a third party must assess the value of the home and property. Once the home value is calculated, the spouse keeping the marital home will give up other assets equivalent to half the home value.
Buyout Payments Over Time
A second way to accomplish a buyout is making payments over time. After a third-party assesses the value of the marital home, buyout terms would be included in the divorce and division of property agreement. Under these circumstances, co-ownership would exist until the final buyout payment is made.
In Lieu of Spousal Support
The third most common scenario happens when spousal support is also involved in the divorce agreement. In this scenario, a spouse who is likely to pay spousal support (alimony) will significantly lower the price or “give” the house to the other spouse in exchange for not paying spousal support.
Remember you are in control and if you can agree upon an equitable scenario a judge will approve the property division.
Start Dividing Property & DebtsGet your WI property division worksheet here. Document property, assets, and debts. Think through how you want to equalize your property division, and avoid a lengthy battle in court.
Co-Own the House
Another option is to co-own the marital home. This scenario is unusual unless one spouse is buying out the other spouse over time. There are some long-term disadvantages to co-owning the house:
When both parties own the property, even though only one party lives there, the mortgage will still be an open expense on both credit reports. Such a large debt on your credit report can make it more difficult to obtain financing for other purchases.
Just like the mortgage, the upkeep for the property is still the responsibility of both spouses. Tracking who will pay for what when will be a continued hassle into the future.
Then there is the issue in regards to the interest deduction. When it comes time for taxes even though both parties will be paying for the mortgage only one party will be able to claim the interest deduction when filing taxes.
Other Notable Risks
Two other risks include what happens if you co-own the property and the other spouse dies? Now you need to create a living will, which adds more cost. Finally, what happens if one spouse gets sued or files for bankruptcy? In reality, there is little way to protect yourself in this scenario.
Co-ownership is always an option, but as you can see, there are several serious risks involved. Be sure you make a decision with careful consideration of the potential risks and disadvantages.
References: Hidden Costs of Selling a House