DIY DIVORCE WHEN YOU OWN A HOME
Often couple filing their own divorce are forced to sell the marital home for financial, personal, or legal reasons. The house likely holds a lot of their wealth and is often their largest asset. Neither divorce, nor the selling of the house, is easy. The divorce and sale together often makes the divorce even more difficult emotionally.
Understanding the three common ways used in the disposition of the marital home is very important for the person who is filing his or her own divorce. Your 3StepDivorceTM account will address the three common approaches discussed on this page.
Selling the house before is likely the best scenario for the "do-it-yourself" filer. It takes away any element of surprise and is often the best option for both spouses financially. It eliminates the unknowns and any financial risk that goes with it.
Emotionally and financially, the sale of the house is difficult because it is painful to realize the fact that there is not enough income to support ownership by one spouse. The other spouse will now have to support his or her new household and possibly pay child or spousal support.
Selling a home during a divorce holds one major difference than a typical sale in that the sellers must decide who gets what before they sell. Whether it’s the furniture, the electronics, or the money from the sale the couple must figure out who walks away with what (typically a percentage).
There may not ever be the right answer to whether or not selling the home or keeping the home is the best solution. However, sale may often be the only option if both parties are to receive an equitable share in the distribution of joint assets. In general couples have three choices when it comes to the marital home. They can 1) sell the house before or during the divorce and split the proceeds; 2) agree to have one spouse buy out the other’s interest as part of the overall settlement; or 3) continue to own the house jointly. Each of these approaches has advantages, depending upon the situation of the couple. A couple filing pro se can approach each of these options.
A Realtor or appraiser can estimate the value of the house and the price that show the best return on investment. A general understanding of the value of the house gives a ballpark estimate of the projected equity to be divided. Often selling a home during a divorce normally requires an appraisal that both spouses agree is a fair price to ask.
Selling the home is probably the most common course in a divorce and raises possible tax considerations and the problems of renting versus buying. At the very least, both spouses should know the basis for the property, original cost, plus any improvements made to the home. Under current tax laws, each spouse may exclude up to $250,000 (or $500,000 as a couple) from any capital gains tax if they lived in the house for any two of the previous five years.
Negotiating a spouse buyout of a house is not as complicated as it sounds upfront, but later it can become tricky. The house is likely going to appreciate or depreciate, and this is where it gets tricky. Depending on which way the house goes one party is going to be upset that the other one made more money. Each party bears risk and both spouses should understand this upfront. It can go either way.
Also keep in mind that often times the custodial parent continues living in the house, and this provides stability for the children in a time where there is so much change.
The terms of the buyout should be included in the Marital Settlement Agreement (MSA), and the buyout of the house is completed as a part of the divorce settlement and divorce paperwork. Refinancing the house and taking out a new mortgage loan, or giving up other assets that are the equivalent to the price of the selling spouse’s share can accomplish this. If there are other marital investments or retirement accounts, these can be used to settle the interest the selling party has in the home.
There are several ways one spouse can continue to keep the house while separating. A spouse buyout is the likeliest of scenarios; however, one way to keep the house is 'rent' it from a former spouse.
A party can rent it out to another family and continue to pay down the mortgage on the home, but he or she should think twice about being a landlord. It is likely any profits or income on the home will be split both ways. It may make more sense to use a property management company that can divide everything equally between spouses.
Being a landlord is not easy. It's even more difficult when it's a property owned with a former spouse. Everything needs to be put in writing because there is a lot of uncertainty as to who pays what, and how costs are allocated -- the new roof, new HVAC, and this all needs to be determined before an agreement is made.
During a divorce, someone may decide to keep the house, and in this case the questions revolve around the mortgage. If both names are on the title and mortgage the departing party carries some risk. A party with his or her name on the mortgage is still responsible for the debt.
Whatever a spouse works out with his or her soon-to-be former spouse must be in writing. Everything should be put in writing; verbal agreements are a bad idea. Divorce can bring out the worst in people, and emotions can drive actions. No one should react to anything not thought through logically.