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 identifying 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 a divorce?” is one of the most commonly asked questions in divorce. As divorce mediators, we have to resolve this issue all the time. Frequently your house is the most valuable asset in your marital estate. Other times it’s a liability that needs to be addressed because the house is underwater (has negative equity). In either case, it’s important to consider the question in light of your overall marital estate.
Many factors affect what happens to your house in a divorce. As a result, there is no simple answer. Therefore, it is important to analyze the issue step-by-step.
1: Determine 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 case, the house is separate property. However, any increase in value on the separate property during the marriage is marital property and will be divided as such.
2: Determine how much equity there is in the house.
To calculate the equity, the value of the house must first 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, market analysis by a realtor is the best affordable option. Once the value of the home is known, you can determine the equity 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, for example, to account for realtor’s commission and transfer tax) from the estimated value.
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)). 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.
3: Determine how marital equity in the house fist into your overall marital estate and how it can be divided.
For example, is your house your only marital 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, if you want to keep it you will probably have to buy out your spouse’s interest by refinancing the mortgage loan with a cash-out.
4: Consider carefully 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. Deciding whether you want the house involves considering several factors. 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 let financial and practical, rather than emotional, factors drive your decision.
5: Discuss the possession of the home and come to an agreement
The good news is that couples are able to agree to what happens to their home in probably 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.
95% of mediations are resolved by an agreement as to what happens to the house in a divorce However, if 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 keeping the children’s living situation and school attendance as stable as possible.
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 after the divorce is settled and the sale of the home is complete. 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.
Tips: The Sale of your House
1: If You and Your Spouse Decide to Sell: Sell as Soon as Practical
Once you are getting divorced, your home becomes more of a liability than an asset. Someone needs to 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 you need time to find a new place to live. That is fine. However, it’s best to agree who will pay the expenses and establish a timeframe for listing your house for sale to avoid any unnecessary conflict.
The cost to sell a house in a divorce is typically divided among 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.
2: 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.