Joint ownership often appeals to couples that want to keep their children in the family house until they finish school. In this arrangement, when the divorce happens, the couple become tenants in common, which means they each own half the house instead of tenants by the entirety, which they were when married. Tenants by the entirety, which is reserved for married people, means both have an undivided 100 percent interest in the house. Normally, the couple works out arrangements whereby one party, the one who stays in the house, pays the mortgage, while all other costs are split evenly between the two of them. When the children finish school, normally the parties sell the house and split the proceeds.
It’s not unusual for spouses to continue owning the family home together after a divorce, especially where kids are involved. For example, if one wants to buy the other out but cannot afford to do it all at once, he or she might agree that payments can be made over time while both spouses keep an interest in the house. Co-ownership also appeals in a weak real estate market when the market might improve later. Couples sometimes delay the sale until a specified event, perhaps the youngest child’s graduation from high school. This is what is called a “deferred sale.”
Former spouses jointly owning the family house after a divorce offers them advantages and disadvantages.
Advantages of Co-ownership
When the custodial parent cannot afford to buy the other one out, then the obvious advantage is that the children remain in the house anyway, giving them security and continuity at a time when they most need it. Co-ownership makes a buyout possible by spreading payments over time.
Disadvantages of Co-ownership
The disadvantages should be considered, however. Because both former spouses are responsible for paying the entire mortgage, a credit report for either shows the entire amount of the mortgage. Carrying a large debt when not living in the house anymore can make it difficult to get credit for other purposes. A late mortgage payment by the occupying spouse hurts the credit rating of the other.
Co-ownership involves real estate accounting. The former spouses must decide how to share the mortgage and upkeep expenses and which one takes the mortgage interest deduction. For example, even if each pays equal amounts on the monthly mortgage, each can agree that one spouse takes the entire mortgage interest deduction in exchange for increased support or some other equalizing payment.
Co-ownership adds another dimension to a continuing relationship with a former husband or wife. Of course, as parents, the former spouses are still in contact, so managing the former family house may not seem an undue burden. However, a successful divorce means emotional disentanglement, so if letting go is a problem, a spouse may be wise to consider another routine and think twice before agreeing to the long-term commitment of joint house ownership.
The spouse not living in the house might have a change of heart later and want (or need) to sell sooner than anticipated. A settlement agreement should specify when the house can be sold, but anyone who’s really determined to get out of an agreement can by forcing a court fight over that issue.
Couples who own the house for more than six years after a divorce becomes final are at risk of losing the tax benefit of IRS §1041, which provides that transfers between spouses as a result of a divorce are not taxable as long as the transfer takes place within a year of the divorce becoming final, or as long as it’s “related to the ending of your marriage,” which means it’s made under a written agreement or order and occurs within six years of the date your divorce becomes final.
Divorcing spouses should consider what happens if one of them dies because each has the right to bequeath his or her half at death. Couples can agree to leave each other their respective shares of the house for the duration of the occupancy, so that the resident spouse can continue to stay as planned.
A bankruptcy by either spouse puts the house at risk for both because in either of these cases, the bankrupt spouse’s share can be seized, possibly even resulting in a forced sale. There’s really no way to protect against this, so if you believe it’s a meaningful risk, don’t go the co-ownership route.