1. Sell the house immediately and split the proceeds
Selling the home prior to the divorce definitely saves time, money, and hassle. The couple pays only the routine real estate fees associated with any sale.
If they wait until during or after the divorce to list the house, each spouse is likely to submit the paperwork for review to that person’s attorney and pay hourly fees.
“It’s easier if they sell the house before the divorce and escrow the money,” explains David S. Rubin, an attorney with over 45 of experience in Baton Rouge, Louisiana. “Then you’re only dealing with the cash. They’ve paid off the mortgage, and you don’t have a problem with indemnification of the borrower.”
If you decide to pursue the sell-first strategy, be sure both parties are committed to the sale and stay legally married until the paperwork clears. That’s because if the home is jointly owned, both parties will have to sign all documents.
Divorcing in the middle of a sale can impact the escrow period and title. Even seeking counsel once the property is listed can cause a change of heart for either party or a shake-up that jeopardizes the transaction.
“A lot of our clients come to us before they have sought counsel with an attorney,” explains Lori Fowler, a top Fort Worth, Texas, real estate agent who estimates 20% of her business consists of clients involved in a divorce.
“They’ve decided to divorce amicably, sell the house, and split the profits equitably,” she says. “Then, they each want to relocate and find another property on their own. So, we just instruct the title company to divide the proceeds equally in half.”
It’s important to note that the property division laws of your state will determine how any proceeds of a home sale are divided in a divorce.
2. Buy out the other party
In this option, one spouse gains sole ownership of the property by buying out the other spouse’s interest in the home.
Typically, the spouse who wants to stay in the house must buy out the other spouse’s share of the equity by applying for a new loan in his or her name.
For example, if the house is worth $350,000, and the couple still owes $200,000, then the shared equity is $150,000. The spouse taking ownership of the home would pay $75,000 to the other spouse to buy out their interest.
The spouse accepting the buyout will lose out on any appreciation in value the home may achieve in the future. The buying spouse takes on all the liability and financial burden of the new mortgage, along with all other risks and responsibilities that come with homeownership.
A buyout can also be arranged to occur over time. Any kind of a gradual buyout arrangement is typically outlined in the divorce settlement agreement.
Shawn Leamon, a certified financial analyst in Dallas, Texas, who specializes in divorce matters, suggests talking with a mortgage lender before deciding if a buyout is a good option for you. “That can have a very big influence on your options.”
Buyouts in a divorce can be complex depending on your state’s community property laws. Consult with your legal or financial advisor to find out how this option might work for you.
3. Divide large assets
If a divorcing couple owns multiple shared large assets, such as a second home, large boat, RV, or a significant stock portfolio, sometimes the best option is to divide the assets evenly.
This option can take the sale of the primary home off the table. It can also be a more timely way to settle the divorce because it eliminates the need to wait for a real estate transaction to be completed, and takes away the often drawn-out negotiations about which party should receive a larger share of the appreciated value of the house.
However, dividing large assets can come with its own set of challenges. It can be tricky to negotiate and agree on the value of each large asset, especially in a contentious divorce.
It should be noted that selling the marital home and dividing any equity can also be considered part of dividing large assets.
4. Co-own the house
The option to co-own a home in a divorce is more common when there are children involved. It allows a custodial parent to continue to live on the property and have exclusive use of the house.
This strategy typically involves delaying the sale of the marital home until a set later date, such as when the child turns 18 or graduates from high school, at which time the home can be sold.
Deferred sales
With a deferred sale, also known as a temporary delayed sale, the former couple comes to an agreement on how mortgage payments will be divided up, and which parent will remain in the home with the child or children.
In some situations, if an amicable agreement is not forthcoming, a custodial parent can file for a deferred sale order. Courts in states that allow this will typically base approval of a deferred sale order on two factors: is it in the best interest of the child, and is it financially feasible for the custodial parent.
Leamon says court orders can often be avoided with proper planning and communication. In fact, he explains, some couples with children will note in their divorce settlement paperwork that they’ll sell the house once their children are finished with school. “It makes more sense from a life perspective,” Leamon says.
Benefits
Besides the obvious benefits to the children, another upside to a deferred sale is that both parties can benefit from the appreciation of the home’s value until that deferred sale date.
This option can also be used if you aren’t currently able to buy out your spouse. For example, if one spouse wants to buy the other spouse out but can’t afford to do it all at once, you might agree that payments can be made over time while both of you keep an interest in the house.
Drawbacks
There are some drawbacks to co-ownership. You remain financially tethered to your ex-spouse through a shared mortgage debt, which could impact your credit score if they run into credit problems. You also will still need to maintain a working relationship with your former spouse, which can be challenging depending on the circumstances of the divorce.
Whenever you sell the house, the co-owner who has not been living in the home for at least two of the previous five years may have to pay capital gains tax on the proceeds. That amount of tax burden might significantly diminish your equity. Consult with your financial advisor before deciding on a co-ownership option.
Less common options
There are other less common options to keep the house, such as renting out the property as co-landlords; or a strategy called bird nesting, wherein divorced parents take turns living in the home when they have custody. Both of these involve a high level of agreement and interaction with your ex-spouse.
