In a divorce the house is either sold and the net proceeds are distributed between the parties, or one of the parties buys out the other party’s interest in the house through the asset distribution, by cash, or some combination of the two.
While that sounds simple in theory, the details of the process are much more complex. The process includes identify each of the parties’ ownership interest in the house, valuing the house, and then figuring out how the house works into the entire marital property distribution scheme.
What happens to your house in divorce is one of the most common questions raised in divorce.
Most often, your house is the most valuable asset in your marital estate. Other times it’s is a liability that needs to be addressed, because the house is underwater (has negative equity). In either case it’s important to consider this question in light of your overall marital estate.
Many factors affect what happens to your house in divorce. As a result, there is no simple answer.
Therefore, it is important to analyze the issue step-by-step.
The first issue to be addressed when dealing with a house in divorce is determining whether the house is marital or separate property.
Most commonly, the house was purchased by the parties during the marriage and, therefore, is entirely marital property. Another relatively common scenario is that one party purchased the house before the marriage, and that party remains the only person on the deed. In that situation, the house is separate property. However, any increase in value on separate property during the marriage is marital property.
The second question to be answered when dealing with a house in divorce is how much equity there is in the house.
To calculate the equity, first the value of the house must be determined. It can be determined in one of four ways: (i) by agreement of the parties, (ii) by a realtor’s market analysis, (iii) by an official appraisal, or (iv) by the actual sale of the house. Generally a market analysis by a realtor is the best affordable option. Second is determining the equity in the house. This can be accomplished by subtracting the outstanding balance of any liens (mortgage loans, home equity loans, etc.) and the estimated cost of sale (7% of value in Pennsylvania to account for realtor’s commission and transfer tax) from the estimated value. By way of example, if your house is worth $300,000 and has an outstanding mortgage balance of $200,000, then your equity would be $79,000 ($300,000 – $200,000 – $21,000 (i.e. 7% of $300,000)). It is important to know that If the house was purchased by one of the parties prior to the marriage, the equity must be apportioned between marital and non-marital portions.
Once the amount of equity in the house is determined, you need to consider how it fits into your overall marital estate and how it could be divide between the parties in the divorce.
For example, is your house your only martial asset? Or, are there other significant marital assets, such as investment and retirement accounts? What share of the marital estate do you expect to receive? If there are other significant assets, you could possibly retain the house (and the equity in it) by having your spouse keep a higher percentage of the remaining assets. In comparison, if the house is the only significant marital asset and you want keep it you will probably have to buy out your spouse’s interest by refinancing the mortgage loan with a cash-out.
Once you have a good idea of the equity in the home and your overall marital estate, you can then consider if you actually want to receive the house in the divorce settlement.
In general, either party may request that they receive the home in the divorce. There are several factors to consider when deciding whether or not you want the house. First, you should consider the amount of equity in the home in conjunction with all of the other assets and debts in the divorce, as discussed above. Second, you should consider the expense of maintaining the home without the help of your soon-to-be ex-spouse – will you be able to afford the mortgage payments, upkeep and other expenses? Other things to consider include keeping your children in their current school, if applicable, and the cost to secure and move to a new residence. It’s important to use financial and practical, rather than emotional, factors to guide your decision.
Once each of the parties decides if they would like to keep the home, the parties generally discuss the issue to see if they can come to an agreement.
The good news is that couples are able to agree on what happens to their home in approximately 95% of cases. It is fairly unusual for both parties to want to keep the house. Typically only one party wants the house or the parties want to sell the house. If, for some reason you can’t agree, either because you both want the house or because you can’t agree on the terms of a buy-out of the equity, then the matter must be decided in arbitration or by the court.
If neither party wants to keep the house, the house will be sold and the marital equity divided between the parties.
Most often the marital equity is divided at settlement on the sale of the home, which usually occurs after the divorce is settled. If the house is sold before the divorce is settled, then the money is typically held in escrow until the parties agree to a comprehensive settlement of all of the financial issues in their divorce.
As previously indicated, in 95% of mediations the parties are able to resolve by agreement the issue of what happens to the house in divorce.
However, if the you and your spouse end up having to go to court because you can’t agree, the court will look at factors such as (i) whether the home was owned by one of the parties before the marriage, (ii) who places a higher monetary value the on the home, (iii) who can better afford the home, and (iv) who has primary physical custody of the children, if applicable. The last factor is important because the court will place great weight on maintaining the children’s living situation and school attendance as stable as possible.
If you and your spouse are going to sell your house, it’s generally best to do so as soon as practical.
Once you are getting divorced your home becomes more of a liability than an asset. Someone needs take care of it and pay the mortgage and bills. Living together during a divorce is also difficult. That’s why listing it for sale sooner, rather than later, is better.
You can wait to sell your house, however, if you and/or your spouse need to continue residing in it for a period of time.
Sometimes remaining in the house is necessary because, for example, you want to keep the kids in their school for the remainder of the school year or need time to find a new place to live. That is fine. However, it’s best then to agree who will pay the expenses and establish a timeframe for listing your house for sale.
The costs to sell a house in divorce are typically borne by both parties.
The realtor’s commission and transfer tax will come out of the gross proceeds from the sale of the home. Improvements needed to get the home ready for sale (e.g. painting,) need to be agreed upon by the parties. If one party advances the cost for agreed upon improvements, he or she is typically reimbursed out of the proceeds of the sale.
If you are selling your home, choose a full-time realtor with experience selling homes in divorces.
Now is not the time to choose your friend, cousin or neighbor who dabbles part-time in real estate. Selling a house as part of a divorce is complicated. A full-time professional realtor will be familiar with selling a house in divorce and will be able to help you prepare and stage your home properly. If a buyer suspects the house is being sold in a divorce, they will think they can get a bargain.
Typically, both parties are permitted to reside in the house until it is sold or one party buys out the other party’s interest.
Unless otherwise agreed, if both parties continue to reside in the house, or if both parties move out, they are both responsible for the costs associated with maintaining the home. If only one person remains residing at the home, typically that person is responsible for the costs.
The most practical way to resolve the issue of what will happen to your house in your divorce is through divorce mediation with an experienced divorce attorney-mediator.
An experienced divorce mediator can help you and your spouse analyze the overall financial picture of your divorce and help guide you to an agreement that makes sense for both of you. You should not take any action to sell or transfer your house without first understanding the entire financial picture of your divorce and coming to a written agreement with your spouse.