FAQ About Splitting the House in a Divorce

Generally speaking, unless a family home falls under an exception, a property (such as a family home) that was accrued during the course of a marriage will be subject to division between the spouses, as any other asset in the marital estate. (There are, of course, some exceptions to this, to include a valid prenuptial agreement or if the property qualifies as “separate” property.)

A house is likely the largest purchase the average person will make in their lifetime. The thought of how to “split” it, or finagling through all of the red tape involved in the finances surrounding it, can feel daunting. But this article aims to shed some light on the matter and discuss some of the most commonly asked questions about splitting the house in a divorce.

What happens to my mortgage after the divorce?

The house is both an asset and an obligation in a couple’s financial portfolio (assuming that a mortgage exists on the house.) As a couple endeavors to split their marital estate, there are a number of options to consider when it comes to the home.

The divorcing couple could, for example:

• Sell the home, and then split any profit,
• Maintain a joint mortgage and become partners in managing the property as an investment property,
• Arrange for one party to “buy out” the interest of the other party in the property.

All of the above options have pros and cons. Clearly, selling the home and splitting the profit is a relatively clean way to divest both parties of their interest and pay them what is due. However, if either party is attached to the home or for some reason does not want to sell, you really have to start looking at other options.

Keeping the home as a jointly owned investment property may work for couples whose divorce was quite amicable, or in situations where the management of the property could be done by the couples’ adult children, or perhaps a trustee. Most divorcing couples would likely struggle with the requirement to work cooperatively with their ex on essential matters such as coordinating who would respond to tenant issues, who was responsible for what maintenance or upkeep costs, factoring in who pays property taxes, etc.

Because of the issues discussed above, the third option of one party “buying out” the other is very common.

Considerations in “Buying Out” Your Spouse’s Interest in the House

Those choosing to pursue buying out their partner need to really consider what this means. Primarily: Can they really afford it?

• Assess your monthly budget – without your ex’s income, can you afford the mortgage?
• Consider costs such as insurance, maintenance, utilities, replacing appliances, property taxes, etc.

A person who chooses to stay in the home will probably need to requalify for the mortgage with a lender, and the lender will require that borrower to provide sufficient evidence that they can afford the home on their own.

Splitting Home Equity

If you choose to sell your home and split the profits, you will need to figure out how to fairly split the home’s equity. The equity of the home is the difference between the home’s current market value and what you currently owe on the home.

For example, if your home is worth $400,000 and you owe $200,000 on the mortgage, that leaves $200,000 in equity. Assuming that you and your spouse split the equity evenly, you will each have $100,000 in your split.

Tax Implications

There are tax implications with selling your home or buying out your spouse’s interest. For instance,  if you and your spouse decide to sell the house, you may qualify to exclude up to $250,000 of a capital gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.  If you decide to “buy out” your spouse’s interest in the home using cash, your spouse will receive this lump sum money tax-free.  IRS Code Section 1071 allows for any spouse to spouse transfer of property that is incident to the divorce proceedings to be tax-free.  It is important to discuss the tax implications with a tax professional alongside with experienced attorneys.

Contact Cardwell, Steigerwald Young

The experienced San Francisco property division attorneys at Cardwell Steigerwald Young are standing by to listen and advise you in your own unique property-division case. Contact our office today to learn more.

Source:

selfhelp.courts.ca.gov/divorce/property-debts