Who Gets the House in a Divorce?
One of the biggest decisions accompanying a divorce is what to do with your home, which not only often represents the largest asset that must be settled but also has significant emotional meaning—especially if you’ve both lived there for several years. In this post, we’ll lay out your options when it comes to next steps for your home in a divorce and considerations for each scenario.
Property division laws
Before we outline your options, it’s important to familiarize yourself with property division laws—especially in the absence of a prenuptial agreement—determining how your assets (including your home) are split during a divorce.
Community property states
The asset-division process is pretty straightforward in nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these places, most items earned or acquired while married are considered “community property” owned equally by both spouses. Should a couple divorce, their assets are split down the middle. Community property includes items such as houses, cars, bank/retirement accounts, and even debts racked up while married.
“Opt-in” community property states
Some states—Alaska, Florida, Kentucky, South Dakota, and Tennessee—have "opt-in" community property laws whereby couples can choose to split assets evenly, but only if both spouses agree to do so. They can do this by signing special agreements or setting up trusts allowing them to treat their assets as jointly owned rather than following the usual "common law" rules wherein each spouse keeps what he/she earns.
Equitable distribution states
All other states use a system called “equitable distribution.” This means that during a divorce, a judge aims to divide assets as fairly as possible—but not necessarily in a 50-50 manner. Hard-and-fast rules about who gets what or how much don’t exist here; it all depends on the specific situation at hand.
Should you own homes in more than one state, the location of your permanent legal residence determines whether you’re subject to community property law.
Common options for home possession in a divorce
You both decide to sell
One of the most common ways to tackle this challenge in a divorce is to sell the property and split the proceeds, giving both spouses a fresh start. Capital gains tax might come into play in this case, but there are exceptions; if you’ve each lived in the home as your main residence for at least two of the last 5 years, for example, you can each exclude up to $250,000 in profit for a total of $500,000. Fail to meet these requirements, and you’ll need to pay capital gains tax on the entire profit.
Active military members forced to move due to permanent change-of-station orders can stretch the two-year rule out for up to an extra 10 years, thus still qualifying for the capital gains tax break so long as they’ve lived in the house for at least two of the last 15 years.
One spouse buys out the other
Another popular divorce option—especially when younger children are involved—is for one spouse to buy out the other’s share of the house, the spouse staying behind typically paying the other half of the equity. Coming up with that much cash can be tough, especially if you fail to qualify for a cash-out refinance or lack other assets to make up the difference. Some couples work out a gradual buyout with the buyer making payments over time instead of all at once.
No matter how the buyout happens, capital gains tax only comes into play when the spouse who retains possession eventually sells—at which time he/she (having lived in the house for at least 2 years) can exclude the first $250,000 in profit from taxes. The tax exemption can increase to $500,000 if the spouse remarries, provided the new couple owns and occupies the house together for at least 2 years.
You both maintain ownership, but only one spouse remains in the home
Divorcing couples sometimes decide to keep the house together with only one spouse actually living there, typically when neither person can afford to buy out the other and selling the house isn’t a good fit—often due to kids. If you go this route, make sure you have a written agreement to protect both spouses and ensure the one departing can still claim the $250,000 capital gains exclusion when the house is finally sold.
It’s smart to nail down how long you’ll keep the house before selling (e.g., waiting until the kids finish school), who’s responsible for funding repairs and the mortgage, who receives the mortgage interest deduction, and what happens if one spouse finds a new partner or passes away while still co-owning the home. Co-ownership does come with risks, however, as late mortgage payments can hurt both credit scores and complications can arise if one spouse is sued by creditors or files for bankruptcy.
You both maintain ownership and decide to rent out the home
Another co-ownership option is to rent out the house post-divorce, especially if you’re in a hot rental market. This works best if you and your ex can work together as landlords, but be sure to flesh out a written agreement outlining who does what—keeping in mind that renting might mean losing some capital gains tax benefits when you eventually sell.
How to calculate capital gains taxes on a home sale
A capital gain is the profit made from a home sale, the formula to determine capital gains tax equating to the net sale proceeds minus your adjusted basis. To determine the latter, start with what you originally paid for the house and then add the cost of any major upgrades (e.g., a new kitchen, home addition, or finished basement) plus closing costs and settlement fees. Finally, subtract any depreciation in your home's value. If you purchased your home for $350,000, paid $7,000 in closing costs, and spent $100,000 on kitchen and bathroom upgrades, for example, your adjusted basis would be $457,000. If you sell your home for $800,000, your capital gain would be $343,000.
Calculating your capital gains tax bill
Let’s examine how capital gains tax works for home sales. Using the example above, if you’re married and file jointly—and both meet IRS ownership and use rules—you won’t need to pay federal capital gains tax since your profit falls under the $500,000 exemption (though you may still owe state taxes on your gain). If you’re single and meet IRS requirements, you’ll owe a 15% capital gains tax on any profit above the $250,000 exemption (e.g., if your gain is $343,000, you’d pay tax on the $93,000 exceeding the limit to ultimately equal $13,950). State taxes might apply here, too.
Additional home considerations in a divorce
There are a few other things you need to be aware of before finalizing your divorce, including:
Liquid vs. illiquid assets
While you can quickly and easily turn liquid assets (e.g., your savings account, checking account, or stocks and bonds) into cash, illiquid assets are more difficult to sell quickly with cash conversions taking months (or even years!). The latter involves things like real estate, cars, or valuable collectibles. This distinction matters in a divorce settlement; you might find yourself facing cash-flow challenges if you end up with mostly illiquid assets, even if the split seems fair on paper. That’s why it’s smart to ensure you have enough liquid assets to cover your living expenses, decreasing the chance you’ll need to take out a loan or (in a worst-case scenario) be forced to sell your home just to pay the bills.
Removing your name from the mortgage
If you leave the marital home after a divorce—or if your ex buys you out—it’s important to get your name off the mortgage. That’s because if your ex misses any payments, you are still legally responsible even if your divorce agreement states that your ex will make the payments. Consequently, you’ll hurt your credit and make it harder to qualify for a new mortgage.
Refinancing after a divorce
Before you agree to refinance your home after a divorce and pay your ex (e.g., using some of your home equity to buy out your spouse), make sure you qualify for a loan knowing lenders will look at your credit score and require at least two years of steady income. Many people are surprised to learn they can’t borrow as much as expected, potentially leading to extra costs and additional negotiations with attorneys or mediators.
In sum: home options amidst a divorce
While it’s impossible to circumvent the emotions accompanying a divorce, you’ll want to avoid making decisions based on the same—especially with respect to your home, likely your largest asset.
Still have questions about handling your finances in a divorce? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.
FAQs
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Yes, you can typically refinance a mortgage on your own after a divorce—if you qualify on your own financial merits, that is. Here’s how it usually works: once the divorce is finalized and if you want to keep the home and remove your ex-spouse from the mortgage, you’d apply to refinance the mortgage in just your name. The lender will in turn look at your credit score, income, debts, and overall ability to manage the loan on your own; if everything looks good, you can move forward with your ex released from mortgage responsibility.
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Note that a divorce agreement by itself does not change home ownership. To formally do this post-divorce, you usually need to use a “quit claim” or “warranty” deed to remove one person's name from the title. Once the deed is signed, it must be filed with your local county recorder’s office so the public record reflects new ownership.
About the author
The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.
Retirement Planning | Advice | Investment Management
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. Schedule a no-obligation consultation with one of our financial advisors today!
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
