For many people going through a divorce, their marital home – their house, their apartment – is their most valuable asset and so figuring out how to distribute that value between them is a challenging part, or can be a challenging part, of their divorce process.
I want to touch on one of the three principal ways that you can distribute or divide the value of your home in a divorce process.
The first way I'm going to speak about is by selling the home to a third party roughly at the same time that you're going through the divorce process.
So, maybe during part of the divorce process, you put the home on the market, and maybe it's sold during the process itself or shortly after signing your settlement agreement, but you and your spouse have agreed to put the home on the market and sell it.
A couple of issues come up that I want to walk you through.
First of all, as with any asset that you're trying to divide as part of the divorce, people bump up against the question of, “What's the value of this asset? How do we figure out the value?” The easy thing about figuring out the value of a home you're going to sell to a third party is that there's really nothing you need to do. The value of your home will be determined by the sale price you're able to get when you sell to a third party.
Unlike in a buyout scenario, which I'll talk about in separate episode, you and your spouse's interests are completely aligned when you are selling your home to a third party. You are both aligned in maximizing the value of your home, maximizing the sale proceeds that you get from that sale contract.
What are some reasons why people would want to go ahead and sell their home right away or contemporaneous with their divorce process?
First of all, sometimes people need the money. They have equity in their home, value in their home, and the divorce processes is a financial hardship. Living in two separate households is going to be more expensive, and you and your spouse may need to access the equity that you have in your home.
For other people, psychologically, they both want a clean break from both from co-owning an asset together, which they're not interested in doing, but also neither person really wants to remain in the marital home after the divorce. That's just not an appealing prospect to them.
Or one or both spouses might be interested in staying in the marital home, but they don't have access to the capital that it would take, either now or in the future, to buy the other spouse out of their equity in the home. They don’t have access, they won't have access, to that amount of money, and so they don't really have the option to do a buyout, and thus they need to sell the property.
In some ways, selling your home as part of a divorce process is pretty similar to how it would go if you were married. You will agree on an agent to list your home and to negotiate with potential buyers. You will likely coordinate with each other to do any repairs or fixing-up of the home that needs to be done in order to maximize the sale price you can get and will coordinate around allowing potential buyers to see the home.
One thing that does come up when you're selling a home in a divorce process that's different from if you were just selling it as a married couple is that unless you are both living in the home together, in which case this is not an issue, but if one spouse is living in the home, and the other is not, the issue of who pays for the carrying costs of the home comes up and needs to be resolved as part of your negotiation process.
The carrying costs are typically: mortgage, taxes, insurance, utilities. I don't think of repairs or improvements to the home is carrying costs, though they may be incurred, especially as you're getting a home ready for sale. The cost of just carrying the home and maintaining the asset is something that you and your spouse need to negotiate about and figure out. What portion of that do we see as a shared expense, even for the spouse who's not living in the home, not enjoying the benefit of living in the home, as their residence? To what degree are they also responsible for the costs of maintaining this asset, which they are going to share in part of when it is sold?
And then to what degree is the spouse who's residing in the home solely or primarily responsible for the costs of carrying the home? For instance, utilities costs might be a cost that feels like, "Well, I don't really see how that's a shared expense. It's not a cost we would incur if neither of us were living in the home.” And that definitely feels more like the responsibility of the person who is living in the home and is getting the benefit of living in the home.
There are almost too many variables there for us to go into much detail, but suffice to say, figuring out how you and your spouse will share responsibility for the carrying costs of the home while it's on the market is an important point to discuss and to negotiate, even when your plan is to go ahead and sell the home to a third party. Because that won't happen immediately. It will take some time.
There's also the issue of, depending on how long the person who's living in the home as in the home: is the mortgage principal being paid down? Are both spouses getting credit for that? Is only one spouse getting credit for that?
Also, depending on what amount of time one spouse is living in the home, if there are tax benefits associated with that – mortgage interest deduction or property tax deduction – are the spouses sharing in that? Is one spouse getting that or a disproportionate amount of that? So that's another piece to be negotiated.
Finally, what happens when you sell the home, when you get the sale proceeds? This is also somewhat similar to what would happen if you were married selling the home. You pay off debt that's tied to the home, like your mortgage, and if you have a home equity line of credit, for instance, that gets paid off.
You also incur costs of sale, and the big costs of sale are broker's fee and taxes. So those need to be paid out of sale proceeds. For capital gains taxes, if you owe those, those will be paid in the subsequent year, when you file your income taxes for the calendar year in which you sold the property, so those aren't paid at sale, out of sale proceeds.
Often there are transfer taxes on the transfer of real property, and those will need to be paid at the time the deed to your home is transferred. But the capital gains taxes will be delayed by about, could be up to a year or more, but certainly to the next calendar year.
So, figuring out how you're sharing responsibility for those things: are you sharing responsibility equally? If you're dividing the asset equally, are you equally responsible for the broker's fee and transfer taxes and capital gains taxes? Or are you approaching them in some different way, if you're dividing the asset other than 50/50? Which can happen, in particular where one spouse contributed their own property, their own separate property, to the purchase of the home, or maybe they contributed a large amount of separate property to particular improvements to the home, that increased the home's value.
In those kinds of scenarios, if the parties agree, there may be a division of the sale proceeds that is other than 50/50, and that's okay, too. That's just a point, again, for the two of you to negotiate.
Finally, something to bear in mind, and this may change as the tax rules change, but you want to talk to your attorney and in particular your accountant, about ensuring that you preserve and maximize your entitlement to the exclusion of capital gains on the sale of a primary residence.
That's something that at least as of this recording is available to homeowners, and it's something that can save you quite a lot on capital gains taxes. You can exclude up to, as a couple, $500,000 of capital gains on the sale of your home. That's just something to flag for you. You want to be aware of it, and you want to ensure that your settlement contract is drafted in such a way that preserves that exclusion, in particular if one spouse is leaving the home.
It goes without saying that selling your home is not easy. It's certainly disruptive, and for a lot of people, it is not an appealing option while they're going through this completely disruptive, restructuring of their family, to also be disrupting their living space and selling their home. At the same time, there really are some benefits that come with selling, selling the marital home to a third party during or shortly after the divorce process. So, it’s certainly an option to consider.