Your guide to selling a house during divorce

During divorce proceedings, real estate is often a primary focus as you decide what to do about your shared home. For many couples, a home is their greatest asset. It also may hold sentimental value to both sides. Questions of homeownership — like the division of assets in a sale or deciding who gets to keep the home itself — are complicated and can get testy. If you can't come to an agreement, the court may step in, so it's best to have lawyers on your side.

In many cases, due to financial, legal, or personal reasons, it makes the most sense to sell the house during divorce. But you can always continue to own the home jointly with your ex-spouse, or buy their share of the property so you're the sole owner.

Who gets the house in a divorce?

Most divorces involving a property dispute play out in one of the three ways:

• One of the spouses buys out the other legal interest and keeps the home.
• One spouse keeps use and occupancy of the home for a specified period, usually until the youngest child turns 18, at which point the home may be sold.
• The house is sold immediately, with any equity split up between the spouses.

Who gets the house depends on each individual divorce scenario, which makes it tricky to navigate. Each of the situations highlighted above may play out in different ways depending on the cooperative or acrimonious nature of the divorcing couple. That said, there are a few options to consider when you’re negotiating the future of a house.

1. Divide large assets

If you and your spouse share multiple, large assets — like a second home (in addition to the main home), an art collection, a shared stock portfolio — you might just agree to divvy everything up equally. That way, you each take ownership of assets worth about the same amount.

Dividing large assets can be a quicker way to finalize a divorce since you won’t have to wait for a property sale or endure a long negotiation about who gets a larger share of a home. You’ll still have to negotiate the value of each large asset to land on an equitable agreement, but you won’t have to deal with the stress of selling a home while going through a divorce. 

The division of property can between during a divorce can be difficult to navigate, especially in community property states where marital assets are jointly owned by both spouses, regardless of who paid for it. But if you can come to an amicable agreement together, it'll make things go more smoothly.

It's easy to split up each spouse's separate property, but deciding who owns the assets acquired during the course of the marriage can get trickier, especially if both parties lay a claim to it. Having a family law attorney can be useful in determining who owns what and how to divide it. 

2. Buy out the other party

If you or your partner doesn't want to sell, either of you can buy out the other person. The buyout may be for more or less than half of the market value of the home, depending on each party’s income, financial contributions to the property, and the home’s earning potential. If you’re not interested in a back-and-forth debate, you can agree to settle for half of the home’s market value.

Bear in mind if you're doing a buyout, you must have access to enough cash that isn’t subject to the rest of the divorce proceedings, and be able to afford the mortgage on a single income. (In some cases, however, you can roll a buyout into a larger home refinancing.) 

3. Co-own the home with your ex-spouse

In an amicable divorce, a couple can agree to a co-ownership plan. In this scenario, you’ll agree on how mortgage payments will be split, when they’ll be paid each month, and how to distribute the proceeds of a sale should it happen down the line. Children can stay in the home and nobody has to worry about dipping into savings to buy out the other person.

In this scenario, you’re still financially tethered to your former spouse. Even if you’re divorced, late payments on a co-owned home will affect both peoples’ credit scores.

Also, in the event of a sale, a homeowner who doesn’t live in a home as a primary residence for at least two of the previous five years won't be able to claim the Home Sale Tax Exclusion. They’ll be facing full capital gains on any appreciation in a sale, which could be a sticking point, unless you agree on a sale timetable that gets both spouses the tax exclusion. 

Why you might have to sell your house during a divorce

You don’t have to sell your house during a divorce, but there are a number of reasons why selling may be the better choice. Despite the stress and headaches of selling during a divorce, it may be the preferred option for a number of reasons.

1. Financial reasons

When you bought the house together, you may have had two incomes to cover the expenses. If either party can’t afford the mortgage, insurance, property taxes, and maintenance on a single income, selling the house may be the most viable option. Selling also allows the spouses to cash in on their home equity and split the profits. 

2. Legal reasons

In most cases, each person contributed to the purchase of the home, even if it wasn’t a 50/50 split. If you each want the house but can’t come to an agreement outside of court over who should get it, the courts will decide for you.

Court battles rarely work out just like either party would like and can lead to further animosity between the couples, complicating the divorce. Most people want to avoid a court case, so agreeing on a plan to sell the house and split the proceeds is often a simpler solution.

Once the family home is sold, the division of assets in the divorce should become more comfortable since you’re not trying to speculate as to the future value of the house. Selling takes time and effort, but agreeing to sell and how to split the money will avoid the pain and expense of a legal battle.

Can the court order the sale of a home during divorce?

The court may order the sale of a house in certain circumstances, usually if the divorcing spouses are unable to reach a mutual agreement on how to divide the property or whether to sell it at all. This is known as a forced sale or partition sale. 

When the court orders the sale of a home, they'll try to divide the proceeds in a manner that it feels is fair and just — courts believe in equitable distribution. Judges will try particularly hard to divide the profits evenly in community property states, where spouses are each entitled to half of everything acquired during marriage. The court can also step into during a home sale if disagreements arise during the process, like choosing how much to sell the house for.

It's worth noting that a forced sale can be a stressful and emotional process for everyone involved in divorce process, including the children. The court may take the interest of any minors before ordering a forced sale of a family home. If you're in the midst of a divorce, you may want to consult a legal professional and try to reach a mutual agreement on how to divide the property before resorting to a forced sale. 

3. Liability reasons

If one person insists on keeping the house, it’s important to understand the liability risks and difficulties of being a single homeowner.

One spouse may have enough income to take over the mortgage and all payments, but that also means eliminating the other spouse from liability. They’ll have to talk to the lender and refinance the house, qualifying on a single income for a house that was likely purchased with two incomes.

The spouse who wants the house might have the liquid cash to buy out the other, but a lender might not agree that they’ll have the continuing income to keep up with all the increased mortgage payments.  If the lender won’t back a single owner, and the other spouse refuses to continue making payments on the house, you have to sell or risk foreclosure. Homeownership comes with significant liability risks and financial requirements. If you can’t take on those risks alone, you could lose your home or destroy your credit.

Should you sell your house before getting divorced?

There’s a major financial incentive to selling the home before getting divorced. As mentioned before, the Home Sale Tax Exclusion says that if you are married and sell a home, you don’t have to pay capital gains taxes on up to $500,000 in profit. If you’re single, the capital gains tax exclusions drop to $250,000. Learn more about the tax implications of selling a house

To be eligible for the exclusion, you must have lived in your home as a primary residence for two of the last five years. If one person hasn’t or won’t live in the home, it may make more financial sense for both parties to sell the house before a divorce is finalized so you can write off a larger profit. Couples can apply for this tax break whether they file a joint tax return or if they file separately, so you don’t have to still be married when it's tax-filing time.

If you're considering selling your house, consider listing with Orchard. We can help you buy a new house before you sell the old one.