It should come as no surprise that of all the questions we receive at our firm, “Who gets the house in a divorce” is one of the most common. Let’s look at some of the options and consequences, including tax ramifications, of selling or keeping the marital home in a divorce.
One Spouse Keeps the House
One choice that is very common is for one spouse to move out from the martial home and one spouse remains. The parties will need to address who will pay the mortgage and all the costs associated with the home, including taxes, repairs, homeowner association dues, lawncare, insurance, utilities, etc. Often clients will state: I want to be removed from the mortgage because my soon-to-be-ex wants to stay in the house and take over all the expenses. There are two important documents to discuss: the deed and the deed of trust (aka the mortgage). The deed is the document that states who owns the property.
Usually with a married couple, the deed is held by the couple as tenants by the entirety. To make the spouse who stays in the home the sole owner, the spouse who moves out can sign a “quit claim deed”, transferring his interest to the spouse remaining in the home. However, the deed of trust still needs to be addressed. The deed of trust is the document that gives the mortgage lender a collateral interest in the home. That loan was likely granted because the creditor looked at both parties as parties responsible for repaying the home loan. So, if one spouse wants to be free of mortgage liability, the other spouse will need to refinance the home loan.
This is where the parties may encounter an issue if the party remaining in the home cannot qualify to solely refinance. Another consequence can be if the party who moved out of the home wants to purchase another home, being obligated on two mortgages may be an impediment.
Selling the Home
Thus, what may need to happen is that the parties will need to sell the home and divide the proceeds. How the proceeds will be divided is an issue that can be used in separation negotiations. The law assumes 50/50, but the home equity could be used as an item or offset in other settlement negotiations.
The couple should consider the tax consequences associated with the home sale. For a married couple, the IRS allows $500,000 to be tax free for income tax purposes. For filing income tax returns, the government will look at the parties’ status on December 31. Even if one party has moved out but is still married at the end of the year, the couple does not have tax liability for up to $500,000 in proceeds from the home’s sale. So, a couple can exclude a total of $500,000 of gain from the sale of the marital home if one of the parties has lived in the home for the past two years.
If one of the parties stays in the home for some time and buys out the other spouse, there is no tax consequence because it is a divorce related transfer. As a general rule, any transfer of property in a divorce is considered a non-taxable event. But if after a few years the spouse who stayed in the home now wants to sell to a third party, that sole party is limited to excluding just $250,000 in gains for income tax purposes. This tax exemption only applies to the primary residence; it does not apply to second homes or vacation properties.
So timing of the house sale and these tax consequences should be considered by a divorcing couple. If there are children, that may factor in as well. Often parents recognize the value of children being allowed to stay in their childhood home for school assignment purposes and neighborhood relationships. Experts will emphasize how important it is in a divorce situation for minor children to retain some stability. Being able to keep a child in their same bedroom and home (for at least part of the time) can be a stabilizing factor. Some parents will agree that the primary custodial parent can stay in the martial home until the youngest child is 18 and a high school graduate. On the other hand, some families will thrive with a new home and surroundings as each parent and the children all start another phase of life.
Before the House Sells
A divorcing couple may want to consider nesting for a bit which in turn means the home is not immediately sold. The parents may take turns staying in the martial home (or nest) so that the children are not immediately forced to relocate. Nesting can be helpful so that the children do not need to change schools, and the children will not lose their neighborhood friends. A nesting arrangement typically means that the spouses will secure other living quarters so that they can rotate between the new place and the home. For example, the mother may stay in the home with the children for the first week of the month while the father is at the new place. Then the father will spend the second week of the month at the home while the mother stays at the new place. This takes a high level of cooperation.
Also, the parties cannot really be considered separated for the required one year of separation because they are still living under the same roof. Neither parent is considered to have moved out of the marital home in a nesting situation. But nesting does help the children adjust to being with one parent at a time.
Terms to Agree Upon
If a divorcing couple decides that the home will be sold, there are terms that will need to be addressed. There needs to be agreement on the following: who will be the listing realtor; what will be the asking price; what is an acceptable offer; will repairs and upgrades be made; when and how the property can be listed and viewed; how the proceeds will be divided; who is responsible for the upkeep and expenses before closing, etc.
Likewise, the parties may decide to continue to co-own the property but only one spouse will live in the home. This arrangement can work, but again, the parties need to agree on how expenses will be handled and how proceeds are divided when sold.
Often the marital home is the largest asset for a couple. Who gets the house in a divorce and how to handle the home in divorce negotiations is crucial. Both parties will have more input and control over that asset if they can agree on how to handle in a separation agreement and property settlement. A family law attorney can assist with the agreement and a tax professional should be consulted for the various tax consequences.
