How Is Home Equity Split in a Divorce?

How Is Home Equity Split in Divorce?

In a divorce, the amount of home equity each spouse receives depends on a few different factors.

State Laws

When it comes to dividing property, each state follows one of two legal frameworks:

• Community property: Community property states divide most marital assets equally. Any home equity accumulated during the marriage is usually split 50/50 between the spouses, regardless of who's on the mortgage or who paid for the home.
• Equitable distribution: Most states follow the equitable distribution model, which divides marital assets in a way that's considered fair, but not necessarily equal. Home equity may be split between partners based on factors such as the duration of the marriage and the earning power of each spouse.

If you and your partner lived in both types of states during the marriage, the equity may be considered "quasi-community property." A divorce lawyer can help you understand how your assets will be divided in these cases.

When the House Was Bought

If one partner bought the home before the marriage, the down payment and any equity gained before the union could be considered separate property. Courts generally can't distribute this type of asset.

But the court may divide the equity gained during the marriage, as long as both spouses contributed to costs like the mortgage payments, maintenance, repairs and renovations that increase the value of the home.

Prenuptial or Postnuptial Agreements

Some couples enter a prenuptial agreement (before the marriage) or a postnuptial agreement (once they're already married) to spell out the terms of a potential separation.

Both types of contracts specify how assets, including home equity, will be divided. If you and your partner signed one of these legally binding agreements, the court should follow the terms included in it.

Financial Contributions

When dividing assets, courts also look at how much money each spouse contributed toward the upfront and ongoing costs of the mortgage. These costs may include the down payment, monthly payments, property taxes, homeowners insurance and other expenses.

If one spouse financially contributed more toward these costs, they may receive a larger share of the equity.

Learn more: Steps to Take if You Keep Finances Separate in Marriage

How Is Home Value Determined in Divorce?

Your home equity is the amount of your home's value that you own. It's calculated by subtracting your mortgage balance from the current market value of your property. Your loan balance should be easy to find, but there are different ways to determine market value. Here are the methods you can use:

• Comparative market analysis (CMA): The home's value is based on the values of other similar properties in the area that were recently sold. These reviews tend to be quick, informal and potentially subjective.
• Broker price opinion (BPO): A real estate agent or a real estate broker estimates the property's selling price based on the home's condition and a CMA. These reviews are more formal and based on a broader range of factors.
• Home appraisal: A licensed real estate appraiser determines the home's value based on a detailed, objective review of the property and recent home sales in the area.

Learn more: How to Calculate Home Equity

Options for Splitting Home Equity in Divorce

In a divorce, the couple and/or the court determines how much of the home equity each spouse receives. But you'll also need to figure out what happens to the home and whether one or both partners plan to stay put. Here are some methods that are commonly used:

• Sell the home and split the proceeds: Once you pay off any mortgage balances, taxes and sale-related expenses, you'll split the remaining money according to your divorce agreement. This can be a good option if neither partner plans to live in the home after the divorce.
• Purchase the other spouse's equity (buyout): One spouse can stay in the home and give the other spouse money to compensate for their equity share in it. A cash-out refinance may be a good option here, since you can use the cash to buy out your former partner while also removing them from the loan.
• Co-ownership: Both partners can continue owning the home together—typically with one spouse living in the home and the other moving out. This is usually a temporary arrangement, and the details should be written into an agreement.
• Deferred sale: The couple can agree to own the property together and sell it at a later point in time, such as after their kids move out or both spouses are financially stable. The details should be captured in an agreement.

Learn more: What to Do With Your Home in a Divorce

Tips for Splitting Home Equity in Divorce

Keep these points in mind when splitting equity in a divorce:

• Consider liens on the property. In addition to your first mortgage balance, you'll need to pay off other debts against the property, such as a home equity loan, before splitting the equity. This step impacts the final amount each spouse receives.
• Decide on the home's future. Discuss whether you and your partner will sell the home, co-own it or have one spouse take over the mortgage. This decision can help you figure out how to split the equity, which details to include in your agreement and whether one partner needs to start the refinance process.
• Consider tax implications. A home sale can trigger the capital gains tax and create other tax liabilities. Working with a tax accountant can help you understand your responsibilities and potentially find ways to manage your tax bill.
• Work with a divorce attorney. An attorney can help guide you through the divorce process itself and how to split assets fairly.
• Create an agreement. No matter what you and your former partner agree to, it's important to create a legal agreement. This should outline how financial contributions will be handled and the plan for selling or refinancing the home.

Learn more: How to Prepare Your Finances for Divorce

The Bottom Line

A divorce can have an impact on your credit, whether you're splitting home equity or not. So it's important to monitor your credit regularly and make sure your shared debts are paid on time. This can help you and your former partner avoid negative items on your credit reports.