Because the home is one of the biggest assets a couple owns, it can also create the biggest disagreements about how it should be divided in divorce. Fortunately, there are several possible ways to go about splitting a home when a divorce takes place.
In some instances, you may need to sell it to get the cash you’ll need as part of a settlement agreement. But under the right circumstances, it may also be possible for one spouse to keep the house too.
Properly dividing the equity in a marital home is a process that requires careful consideration early in the process to ensure a favorable outcome for both parties.
I sat down with Ross Garcia, founder of Divorce Mortgage Advisors and co-founder of Survive Divorce, to discuss the options available for dividing home ownership in a divorce.
Ross Garcia, CDLP specializes in developing divorce mortgage financing solutions. He also takes great pride in advising clients on all potential considerations surrounding real estate division, specific to their divorce settlement proposal.
Survive Divorce: Why might someone be forced to sell their home in divorce?
Ross Garcia: There are two primary reasons. The first is when one spouse is not able to buy out the other spouse’s interest in the house. The second reason is when spouses cannot agree on a value of the house and so the only fair way to split the equity is to sell it to a third party.
Once the decision has been made to sell the house, what are the actual options in terms of how the house is divided in divorce?
There are three simple ways to settle the house in divorce.
The first is to sell it immediately and split the proceeds.
Another way is to have the spouse that keeps the property complete a buy out of the other spouse’s interest in the home. In this case, the out-spouse sells their share of the interest to the in-spouse which usually requires a lump sum payment of some type.
The third way is that both spouses can continue to co-own the house, which will usually result in a deferred sale at a later date.
Just so we’re clear, what do you mean by in-spouse and out-spouse?
The in-spouse is the person that retains the house and continues to either reside in it or own it individually, and the out-spouse is the person that is selling their interest in the property and departing.
You mentioned that often times one of the reasons that couple might be forced to sell their house in divorce is because there’s not enough liquidity. Neither spouse has enough other assets or cash to buy out the other spouse’s interest. What are some of the ways that someone in that situation might be able to tap into the home’s equity?
Aside from selling the house, which would obviously be a source of cashing in on the equity, the other option is to refinance the first mortgage.
One spouse would take out a new mortgage that exceeds the amount of the current mortgage and the difference in those loan amounts would be cash that could then be used for the buyout.
Another option if you don’t want to refinance the first mortgage is to add a home equity line of credit or a HELOC to your existing mortgage. That’s another way to tap into funds for buyout purposes and achieves the same end result.
Could those funds be used for other purposes as well?
Yes. You can tap into your home equity and use those funds to accomplish a number of objectives.
You could use it to consolidate debt. You could use it for attorney’s fees, or keep it on hand as a source for liquid reserves.
You can use both cash from the first mortgage or the security of a home equity line of credit to solve a number of financial challenges you might be facing in a divorce.
What are the alternative options to selling if one individual wants to keep the house and can afford to do so?
If it’s already been determined that one spouse is willing and able to keep the house, there’s two ways to go about that process.
One is to simply transfer title. The out-spouse would sign an interspousal transfer deed transferring title to the in-spouse, and the spouse taking ownership could use other assets such as other real estate that they have or cash balances, retirement accounts, things of that nature to complete the buyout.
Now if you do go that route, you still may have to refinance the mortgage if the loan is currently in both of your names. You would have to refinance that mortgage or assume that mortgage to get it in your name alone. The departing spouse won’t want to keep their name on a mortgage for a property that they no longer own.
The other way is to refinance, as we just discussed, instead of simply completing and filing an interspousal transfer deed. The spouse that retains ownership of the house would need to qualify for a new mortgage in their name alone.
One of the other options you mentioned was a deferred sale. How exactly would that work?
A deferred sale is another good option for many couples. It’s also known as a temporary delayed sale.
It’s a useful strategy, especially when children are involved. Typically, the custodial parent would continue to reside and have exclusive use of the house, but it would continue to be co-owned until a projected sale date is set at some point the future.
It’s worth mentioning that a lot of times in a deferred sales situation the out-spouse, although they don’t get their fair share of the equity when a divorce takes place, one of the benefits to them is that they also get to share in the appreciation of the property value until that deferred sale date.
Regarding exclusive use, is that something that affects tax implications?
Yes. That’s actually an important rule as it relates to the tax consequences of selling a house in divorce.
There’s a rule related to tax consequences where in order to qualify for the exclusion on the sale of a primary residence you need to meet two requirements: an ownership and a use requirement.
The first requirement is you have to have owned the house for two of the last five years. The second requirement is you must have used the house as your primary residence for two of the last five years.
So, if you co-own a house post-divorce, both spouses would meet the ownership requirement.
However, if only one person was using it and enough time passes then technically you would think that the spouse that’s not residing in the house doesn’t qualify for the use requirement.
But the special rule in divorce is that as long as the in-spouse is awarded exclusive use of the house pursuant to a divorce instrument such as a marital settlement agreement or a temporary divorce/separation agreement, then they are treated as if they had used that house as their primary residence. This essentially means they get to piggyback on the ex-spouse’s use.
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