Part of every divorce is dividing up your assets and debts. If the assets include a marital home, it will have to be included in the division. There are three main options:
- Sell the home and split the proceeds.
- One spouse “buys out” the other.
- Continue to own the home jointly.
Data gathering should be done to understand the many financial and tax implications involved.
Here are some of the main considerations involved with each of the three options.
Sell and split the proceeds
- This can help each spouse make a new start – both emotionally and financially.
- It solves the question of what the house is worth. It is worth the price it sells for.
- It can facilitate the overall division of assets and debts. Having a chunk of liquid cash from the sale can make equalization easier to accomplish, if that’s what you want to do.
- It may or may not be a good time in the real estate market to sell. It’s good to understand current and historical real estate market trends for your area.
- Selling costs may be as high as 7% of the sales price. These costs reduce the net after-sale proceeds.
- There usually won’t be capital gains tax to pay on the sale. But find out if there will be and if any steps can be taken to minimize the tax.
- One spouse may have a strong attachment to the home. If you can agree on a buy-out, the spouse wanting to stay in the home, perhaps with the children, can do so. Be wary, however, of letting emotional attachments override financial realities.
- The financial realities, especially the monthly costs and the costs of upkeep, should be made clear to the spouse who wants to stay in the home. Can he/she really afford to do so?
- A problem arises when both spouses are named on the mortgage. It’s generally impossible to remove a spouse from a mortgage. The solution is for the buying-out spouse to refinance the mortgage in his/her name only. But the buying-out spouse may not be able to qualify on his/her own for a refinance.
- The buying out-spouse may not have or be able to generate enough net assets to trade for the home, or the net assets offered may not be acceptable to the spouse who would be bought out.
- When the buying-out spouse later decides to sell, he/she may bear the whole burden of the selling costs and possibly capital gains taxes.
Continued joint ownership
- Numerous detailed agreements are needed to cover all aspects and possibilities as clearly as possible, such as who pays for what costs and how long the joint ownership will last.
- Joint ownership means the spouses remain business partners as regards the house, despite being divorced. Unless the spouses still have a relatively high level of communication, trust and follow-through, serious problems can arise.
- The value of the home will go up or down during the period of joint ownership. Clarify who bears this risk/reward or how it will be shared.
- Certain circumstances can make this attractive. Perhaps the children will finish high school soon and this (or a buy-out) could enable them to continue to live in the family home. Perhaps the real estate market is low at this time or the house is “under water.” Deferring a sale may be financially advantageous.