By Marc Demetriou, CLU, ChFC, CDLP, SVP of Mortgage Lending/Branch, Manager at Guaranteed Rate
In the 1980s, the mainstream media shockingly reported that half of American marriages ended in divorce. Now forty years later, there’s some good news and bad news regarding divorce stats. The good news is divorce rates are down, from approximately 50 percent to 39 percent in 2020.1 The bad news is the divorce rate in America is still too darn high. Which means that there’s still a lot of heartache and a lot of broken homes, literally and figurately. So, how do divorcing families deal with a divided house while also trying to sell it?
Each state makes its own rules
As anyone who has ever been through a divorce knows: there are no “typical” divorces. For example, if you live in a “community property” state, assets that were accumulated during the marriage are split fifty-fifty. But as they say: “the devil’s in the details.” If your spouse moved into a home that you already owned and the spouse’s name was never added to the house’s title, things could get complicated in a divorce. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and sometimes Alaska.2
In the remaining 40 states, marital assets are distributed in a relatively fair manner. But sometimes “fair” is not the same as “equitable.” Judges are human, with human frailties and biases. And let’s not even talk about prenups. If a spouse signed a pre-nuptial before saying “I do”, most judges will treat that agreement as a legal document. Judges love documentation. It’s less work for them.
The three main options for selling the marital home
Many real estate and financial experts say that there are three main ways3 to divide property in a divorce:
- Sell the properties and split the equity – If a couple chooses to go their own way, it would make sense to hire an appraiser who can generate a document that can be taken to a real estate agent or attorney who can then prepare a preliminary closing statement that tells both parties what home assets are available to be divvied up and what outstanding costs (such as title insurance and HOA transfer fees) will have to be paid at closing time. As they say, “the best surprise is no surprise.” From a tax perspective4, when you sell the martial home could be very important. If you sell it jointly before the divorce is final (assuming that the family has lived in the house for over two years), both spouses qualify for tax exclusion of $250,000 per person and $500,000 per couple. However, if the home is sold after the divorce is finalized, there could be some capital gains tax issues to settle. A tax attorney can break down the tax obligations in each scenario in the state you are filing in.
- One spouse buys out the other – If one spouse wants to keep the house, typically that spouse buys out the other and refinances the original mortgage loan under that buying spouse’s name. The new loan will pay off the prior loan and give the other spouse a cash payout for half of the home’s value. Speaking with a mortgage lender or real estate agent can answer many questions regarding how to execute this option successfully.
- Both parties agree to defer selling to a later date – Sometimes certain factors come into play that make selling the marital home not feasible or too disruptive at the time of the actual divorce. If both parties agree to postpone – and sign an agreement to that effect – selling the family home for whatever reason (i.e. the children are still in school and moving might be a big disruption for the kids), this scenario happens occasionally. The obvious point to be made here is one that the mortgage payments still have to be paid on time – by somebody. Also, whichever spouse leaves the home, that spouse can no longer claim the home as their primary residence, thus possibly losing whatever capital gains tax exclusion that spouse qualified for when the house was finally sold. Consult a tax attorney with expertise in divorce cases to get more clarity on this issue.
Other joint decisions are crucial as well
There are other decisions5 that need to be resolved jointly that will directly affect the sale of the marital home as well, such as:
- What home improvements should be made before the home goes on the market?
- Which real estate agent does both parties mutually trust?
- What price does both spouses agree the house should be listed for?
- How will the mortgage payments by divvied up until the sale and for how much?
- How will the profits from the home’s sale be divided up?
Divorce can be a painfully emotional process for all concerned. But keeping a level head, being pragmatic, and maintaining reasonable expectations can help ensure that neither spouse loses their shirt when the martial home is finally sold. Again, consulting a tax attorney (especially one who has experience working with divorced couples) can help both parties move forward with open eyes.
Marc Demetriou “The Divorce Lending Expert” is an SVP of Mortgage Lending & Branch Manager at Guaranteed Rate and is currently licensed in all 50 states successfully serving his clients in traditional and reverse mortgages. He consistently ranks in the top 1 percent of mortgage originators in the U.S., according to leading industry sources Origination News, Mortgage Executive and Scotsman Guide. In his home state of New Jersey, Marc has been featured in NJBIZ's "40 Under 40" and is called upon frequently by the real estate, finance, accounting and legal communities as a trusted expert and speaker.
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