When it comes to divorce, real estate often becomes one of the largest assets to divide. There are various factors to consider depending on the situation, and how real estate is handled can have a major impact on both parties' financial futures. Below are some of the common issues and considerations related to real estate in divorce:
1. Determining Ownership of Property
- Marital Property vs. Separate Property: Real estate acquired during the marriage is typically considered marital property and is subject to division. Property that was owned before the marriage or received as a gift or inheritance may be considered separate property, though this can depend on local laws.
- Commingling: If one spouse owns property separately but has used marital funds to maintain or improve it, the property may become partly marital. This can be very complicated and nuanced and may require the help of an attorney and CPA.
- Title and Deed: Who is on the title can play a role in determining ownership. However, the title alone doesn’t necessarily determine who gets what during a divorce, particularly in community property states.
2. Appraisal and Valuation
- Property Valuation: Both spouses will likely want an accurate appraisal of any real estate to ensure a fair division. The court may order a professional appraisal, or the spouses may agree on one. The valuation should include the market value of the home, any existing mortgages, and other liabilities associated with the property. An appraiser may give a different opinion of value than an experienced real estate agent so it can be useful to engage with both to reconcile the appraised value versus the market value.
- Debt Considerations: Mortgages or home equity loans tied to the property must also be factored into the division. A property might be worth $500,000, but if it has a $400,000 mortgage, the actual equity available for division would only be $100,000, not considering selling costs, etc.
3. Buyouts
One spouse may want to buy out the other’s interest in the marital home. This can be a straightforward option if one party can afford to refinance the mortgage and keep the property (and would like to keep it). The buyout amount is typically based on half of the equity in the home (or another percentage agreed upon by both parties or ordered by the court).
4. Selling the Property
If neither party can afford to keep the home or if a buyout isn't possible, the property may need to be sold. The proceeds would be split according to the divorce settlement or court order. In some cases, one spouse may live in the home for a period (such as until children are of a certain age) while the property is prepared for sale. Consult with a neutral, experienced real estate agent for the best result in the sales process.
5. Custody of Children and the Family Home
The family home often holds emotional value, especially if children are involved. Courts sometimes allow the custodial parent to remain in the family home for stability, particularly if it’s in the best interest of the children. However, this doesn’t automatically mean that the other spouse is relinquishing their financial interest in the property. The non-custodial spouse may be compensated for their share when the property is eventually sold.
6. Tax Considerations
- Capital Gains Tax: If the property is sold, there may be capital gains tax to consider. However, the IRS allows an exclusion for the sale of a primary residence—up to $250,000 for single filers and $500,000 for married couples filing jointly—if certain conditions are met (e.g., the property was the primary residence for at least two of the last five years).
- Mortgage Interest Deduction: After divorce, each spouse may need to adjust their tax filings, especially if one party is awarded the family home. The mortgage interest deduction may shift based on who is paying the mortgage. This can get very complicated and you should consult with your CPA or tax professional to give you specific advice.
7. Mortgage Responsibility
If one spouse is awarded the family home, the other spouse may still be on the mortgage. Even if the divorce decree specifies that one spouse is responsible for the mortgage, the lender can still pursue both parties if payments are not made. This is why it's important for the spouse assuming responsibility for the home to refinance the mortgage in their name alone, if possible. This has been extra challenging recently with mortgage rates jumping up significantly.
8. Practical Tips for Handling Real Estate in Divorce
- Get Professional Help: Consult with a real estate agent and/or an appraiser to understand the market value of the property. A lawyer specializing in family law can help navigate the legal aspects. Also speak with your CPA to determine any unforeseen tax consequences that could impact the division of assets.
- Consider Long-Term Impact: While keeping the house might seem appealing for emotional reasons, it's important to assess whether you can afford the mortgage, taxes, and maintenance costs (and the work of maintaining a home) on your own.
- Negotiate: Divorce is often a negotiation process. Both spouses will likely have to make concessions in order to reach a fair settlement, which may or may not include disposing of real estate as part of the settlement.
