What Happens to a House in a Divorce

Going through a divorce requires the couple to make agreements on joint assets, like the marital home. But it doesn't mean that your only option in a divorce is selling your house.
TAKEAWAYS
Options for what happens to the house in a divorce:

• Dividing assets — one person gets the home, the other gets other assets
• Buying out the other party
• Co-owning
• Selling with the other party

Who gets the house in a divorce?

Divorcing spouses must divide their assets as part of their divorce settlement, but how your home (or the proceeds of the sale) is distributed depends on when you acquired the home and which state you live in.

Of course, the guidelines set by the state you live in only apply if your case ends up going to court. If you and your spouse negotiate a settlement outside of court, then you can decide together what is best for both of you.

What is marital property?

Generally, marital property includes anything you or your spouse acquired or earned during the time you were married. Examples include money earned at work, cars, and the home you bought together.

What is separate property?

Separate property belongs to only one spouse, and whether your home counts as marital property or separate property can vary based on a few factors, including whether you live in a community property state or an equitable distribution state.

What is a community property state?

In a community property state, almost everything you acquired during your marriage is owned 50/50, including income, assets, and debts. There are a few exceptions, including for property owned before your marriage.

If you owned your home before you were married and your spouse's name was never added to the title, you retain separate ownership (although your spouse may be entitled to half of the appreciation of the house during the time of the marriage — this can be complicated, so always check with an attorney).

Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is an opt-in state, meaning you can declare your assets community property before or during your marriage by filing with the state.

What is an equitable distribution state?

In the other 40 states, assets are distributed fairly, but not necessarily equally. In an equitable distribution state, a judge may make decisions on who gets what based on income, financial contributions, earning potential, or other factors.

What is a prenup (or post-nuptial) agreement?

Pre-nuptial (before the wedding) and post-nuptial (after the wedding) agreements are legal documents signed by both spouses that detail who would get which assets (and who would be responsible for which debts) in the case of a divorce.

These agreements remove many of the question marks, and the agreement stands regardless of whether you live in a community property or equitable distribution state. Nuptial agreements are most commonly executed by couples when one or both parties has significant assets before the marriage.

House options when going through a divorce

When you own a home together and are divorcing, there are a few options for what to do with your house.

Option: Divide large assets

If you and your spouse have multiple large assets — for example, your primary home plus a vacation property or a large stock portfolio — you may just agree to divvy up the assets, with each person taking ownership of assets worth roughly the same amount. For example, one person keeps the family home and the other gets the boat and the stock portfolio.

Why go this route: Dividing large assets can be a quicker way to finalize a divorce, since you don't have to wait for a property sale or go through a long, drawn-out negotiation regarding who should get a bigger share of the appreciated value of the home.

Keep in mind: You'll still have to negotiate the value of all the assets in order to find an equitable agreement.

Option: Buy out the other party

In a buyout, the person who wants to keep the home pays the spouse half of the current market value of the property in order to gain sole ownership. In an equitable distribution state, the buyout may be more or less than half of the market value, depending on the factors mentioned earlier: income, financial contributions, and earning potential.

Why go this route: One spouse may choose to keep the family home to maintain consistency for their children, or because it's close to school or work. It's also a good option if your local real estate market isn't favorable, and you'd take a loss if you sold.

Keep in mind: This option requires that the person doing the buying out has access to a significant amount of cash that isn't subject to the rest of the divorce proceedings, although it is sometimes possible to roll a buyout into a home refinancing. It's also important to make sure you can still afford your mortgage payment (if you have one) on a single income.

Option: Co-own a divorce home

Divorcing couples can decide to keep owning a home together, agreeing on details like how mortgage payments will be split, when they'll be paid each month, when it will eventually be sold, and who will get the proceeds of the sale of the house at that point.

Why go this route: It's another option that allows children to stay in their home. And, it's a practical option  when one person cannot afford to buy the other one out.

Keep in mind: Late payments will affect both owners' credit scores, even if you're divorced, so it's important that both parties agree to pay on time. And the owner who won't be living in the house needs to pay attention to capital gains tax exclusions — if you go to sell and you've owned a house for the past five years, but not lived in it as your primary residence for at least two of those years, you'll be on the hook for capital gains taxes on the appreciation when you sell. (More on capital gains taxes in “Tax implications of selling the marital home.")

Option: Sell the marital home

One of the most common options, this is when a couple decides to put the home on the market and split the proceeds.

Why go this route: Selling a home offers a clean break and closure for the divorcing couple. It also can provide each party with cash to cover divorce attorney fees, settle debts, and find (and afford) new living situations.

Keep in mind: If you haven't owned the home for at least two years, you will have to pay capital gains taxes on any profit. (More on capital gains taxes in “Tax implications of selling the marital home.")

Negotiating the sale of a marital home

Selling a home requires agreeing on a wide range of decisions, including list price, contract negotiations, and closing date. A joint sale taken on by a divorcing couple requires good communication and cooperation among you, your spouse and your attorneys.

Here are a few things that need to be agreed upon to successfully sell:

• Making home improvements: You'll need to decide if you want to complete specific home improvements or sell as-is.
• Hiring an agent: You'll need to find an agent you can both agree upon.
• Splitting the costs of marketing: You'll want to agree ahead of time on splitting the cost of professional photography, online listings, staging, etc.
• Setting a reasonable sale price: You'll have to agree on what to list the home for, which  can also factor into other divorce negotiations.
• Considering an investor purchase: If you and your spouse want to sell the marital home as quickly as possible, you might agree to sell to an investor. 
• Accepting an offer: You've received an offer — great! Remember, both parties have to agree on the terms of the offer, or agree on a counteroffer if you'd like to continue the negotiations.
• Making mortgage payments prior to sale: While your home is on the market, you'll continue to make mortgage payments. It's important to agree upon who will be making those payments, and who will get that portion of the principal back after closing.
• Splitting proceeds from the sale of a house: With home improvements, staging, fees, and commissions, selling a house can be expensive. Once the sale is finalized, be sure both parties have  settled all selling expenses before splitting the profits. Many of these costs will be handled in closing. Common payments include:
  • Paying off the mortgage
  • Paying off any equity lines of credit
  • Paying any liens for unpaid property taxes
  • Paying agent fees and closing costs

  Tax implications of selling the marital home

  
  The biggest tax-related issue to watch out for when selling is capital gains taxes. Capital gains taxes are federal taxes paid on the profits you make when you sell your house (assuming your house value has appreciated). Luckily, if you're selling your primary residence, you can usually write off most, if not all, of the profits with the home sale exclusion. If you've lived in the home for at least two of the past five years, you'll be off the hook for paying taxes on up to $250,000 (if single or filing separately) or $500,000 (if filing jointly) of the proceeds you make from selling the home. Of course, it's best to speak to your tax professional before making any capital gains-related decisions.

• Selling the home as a couple: If you've both lived in the residence for two of the past five years, you qualify for the full exclusion of $250,000 per individual or $500,000 per couple.
• Selling the home during the divorce: Depending on your tax situation, it can be beneficial to wait on finalizing your divorce until you've closed the sale and filed your taxes jointly. This allows you to make sure you can get the full tax exemption.
• Selling the home after the divorce: If you decide to wait to sell your home until after your divorce is finalized, each partner can still claim the full $250,000 exclusion, assuming you meet the two-year residency requirements. But pay attention to the time limits — you'll want to sell before three years have passed to avoid paying capital gains taxes.

  Timing the sale of a marital home

  Once you've both decided that selling is the best decision, you're probably eager to get it done. But consider a few important timing-related recommendations:

• Sell during a sellers market: To maximize profit and speed up the sale, try to sell in a sellers market, where many buyers are competing for few listings.
• Sell in the spring: In almost every part of the country, spring is the best time to sell, which can make the whole process go more quickly.
• If you have kids, sell in the summer: To help ease the transition for children, consider selling during summer break so they don't have to change schools and routines mid-year.
• Sell before going to court: If both parties can agree on what to do with the home, it's always advantageous to sell the home without getting the court involved. If a couple can't agree, a judge will decide. A lengthy court battle is expensive for everyone and there's no guarantee you'll get an outcome you like.
• Sell before your tax exclusion runs out: Remember, to qualify for a capital gains tax exclusion, you must sell within three years of vacating the home.
• When it comes to selling their home, divorcing couples have three options for timing.
  

  Selling a house before a divorce

  There are no legal restrictions on selling a home prior to filing for divorce. Before you've filed, the transaction is exactly like it would be if you sold at any other point in your marriage. The benefit of selling before filing is you can both use the proceeds to find new living situations, pay off debts and hire attorneys.

  Selling a house during a divorce

  Once a spouse files for divorce, typically a Standard Family Law Restraining Order prohibits the sale of the family residence without a court order. Attempting to sell mid-divorce can be tedious and slow down your divorce proceedings, because of increased legal involvement and ongoing asset mediation.

  Selling a house after a divorce

  Waiting to sell until your divorce is finalized can make it trickier to divide the proceeds, since you'll have to calculate how to split the equity earned since the divorce was finalized. And since you'll both be responsible for paying the mortgage (and new housing costs) in the meantime, you may be more likely to fall delinquent.

  Top image from Stocksy.