After a divorce takes place, many people are presented with the opportunity to move on with their lives. However, a divorcing couple will almost certainly have financial obligations that must be taken care of depending on the divorce agreement, one of which might be selling the marital home.
Americans have around 150k in equity on average tied up into their homes, so ensuring that one of the largest assets owned together is handled responsibly is in both parties’ best interests. Assuming neither spouse wants to buy out the other one and stay in the home, then selling the home after a divorce might make the most sense.
Divorce settlements and real estate
A divorce settlement agreement outlines the terms of the divorce and includes things like custody of children, pets, and assets like real estate. Before getting a formal divorce, deciding what to do with the house and then incorporating it into the divorce settlement agreement could be the best path forward. Below are some options to include in the divorce settlement.
- Sell the house and split the proceeds: Both parties might decide to put the home on the market and agree to split the proceeds upon closing the home sale.
- Buying the other party out: One person might want to stay in the home and the other might want to leave. The person that wants to stay in the home will need to buy out the other party’s share of equity. This is especially common if there are children in the home.
- Keep the house and rent it out: Couples that are still on good terms sometimes might decide to wait to sell and will rent it out instead. This might also make sense in a booming rental market or in a real estate market where selling conditions are more in favor of the buyer.
Determine how much home is worth
No matter what the divorcing couple decides to do (sell, buyout, or rent), they will need to figure out the value of the home.
If a buyout is part of the divorce agreement, a professional appraisal will be ordered by the courts to determine the fair market value of the home. This will determine what the amount is that is owed by the party deciding to stay in the home.
Likewise, if both parties are selling their home as part of the divorce agreement, then a comparative market analysis will need to be drafted by a real estate agent to determine what it can sell for. If one or both parties don’t agree with the price that the real estate agent came up with, then a professional appraisal will need to be ordered.
Is someone keeping the house?
Some people feel emotionally obligated to keep the house after a divorce, but the person wanting to do so needs to make sure their finances allow for it because they’ll have to carry the load of the home on their own.
The person wanting to keep the home will also need to qualify for the refinance on their own and also have the funds to buy out the other spouse’s equity.
Likewise, the person that is leaving the home should ensure that they have their name removed from the mortgage (via a refinance) because if the previous spouse doesn’t pay the mortgage, then everyone listed on the mortgage will be held liable for what is owed.
It’s important to not forget about tax implications when selling a home. It might make sense to sell the home while still married vs. after the divorce. Without proper planning, a couple could significantly increase their capital gains tax burden.
The IRS allows for married couples to deduct up to $500,000 in realized profits from the sale of their home while single filers can deduct up to $250,000. While this amount of profit might be rare, the tax liability could still be increased if this is not taken into consideration.
To qualify for this deduction, the property must be owned for two of the last five years and also be the primary residence for two of the last five years.
Know property division laws
Depending on the state that the divorcing couple lives in, there might be an impact on how the property is handled.
If the couple lives in a community property state, then all of the property collected while the couple is married is considered community property or marital property.
Likewise, if any property was owned before the marriage or after, then that property is excluded from community property rules and is considered separate property.
In the case of real estate property, a couple that bought a home together while married would split the proceeds 50-50. However, if one person purchased the property before the marriage, that person would be the sole beneficiary.
On the other hand, in states known as “equitable distribution states” the property would be divided fairly but not necessarily equal. This could be due to higher contributions in income or contributions to the family in the form of involvement. This means that one spouse might have a higher amount of ownership in the property which could have implications in the form of an easier buyout.
It’s best to consult a divorce attorney to determine the best route to ensure the divorce is finalized properly.