Getting divorced can be a stressful process. In addition to dealing with the end of an important relationship, it also involves how to split up assets, liabilities, personal effects and more.
If you and your soon-to-be-ex-spouse own a house together, it can be tough to know what to do with your marital home, especially if you have children. Potential options include selling the home and splitting the proceeds, having one party buy out the other or continuing to co-own the home.
Here's what you need to know about each of these options and how to determine the right path forward for you.
Sell the House
The simplest option may be to simply sell the home and split the proceeds. In this situation, both parties would get half of the profit and find their own separate housing. This can be particularly worth considering if the couple has no children and there's no fear of disrupting their lives more than is usual with divorce.
However, if you're underwater on the loan, selling it would leave a deficiency balance you'd both need to share. Also, if one spouse is a stay-at-home parent with no income or may have trouble finding other housing due to income or credit issues, it might not be the best fit.
Pros of Selling the Home
- Creates a clean break: By selling the home, you don't need to come up with a more complicated solution to the problem.
- Potential tax benefits: If you sell the home before you get divorced, you may be able to take advantage of a higher tax exclusion. More specifically, couples who are still married on December 31 of the year for which they're filing taxes can still file their tax return jointly, and they can exclude up to $500,000 of their gain from selling the property instead of the $250,000 limit if you file individually. If the proceeds exceed that limit, you can share the tax bill equally.
- A new start for both parties: Staying in your marital home can make the divorce process more difficult, as you'll run into constant reminders of your life together. By selling the house, both spouses will get the chance to have a new space to make their own.
Cons of Selling the Home
- Selling costs: In addition to the proceeds, both parties will also need to share the selling costs, which can reduce how much each spouse takes away from the divorce.
- One spouse could be disadvantaged: In situations where there's a discrepancy in income or credit score between the two parties, it may do more harm than good for the spouse that might have a harder time finding new housing.
- Potential negative impact on children: If you have children together, divorce will undoubtedly cause a major disruption in their lives. Selling the home and moving away from a space they're familiar with and their friends could exacerbate the problem.
Have One Party Buy Out the Other
If you've decided that it makes sense for one spouse to stay in the home, they could potentially buy out the other.
For example, if you have $100,000 of equity in the home, the spouse staying in the home could forgo $50,000 in retirement funds or other assets, take on more of the marital debt or get a cash-out refinance loan, giving the other spouse their share of the equity.
This approach can be helpful in cases where both parties want to avoid uprooting their children, or one party would benefit from staying where they are rather than finding a new place to live.
On the flip side, it might not work if the spouse remaining in the home doesn't have the income or credit score to get approved for a cash-out refinance, or the new loan would be unaffordable.
Pros of a Buyout
- Minimal disruption for children: If parents can manage to minimize disruptions in their children's lives during divorce, the children can benefit greatly from this decision.
- Benefits a disadvantaged spouse: If one party would have a harder time obtaining separate housing than the other, having them buy the other out could help them avoid a more difficult situation.
- Moving spouse can avoid selling costs: As with selling the house, the person who's moving out will get their share of the equity, but they won't have to worry about covering half of the potential selling costs.
Cons of a Buyout
- May not be possible: If the spouse wanting to keep the house can't get approved for a cash-out refinance loan on their own, it could be challenging to make a buyout work unless there are sufficient other assets (such as retirement savings).
- Loan payment may be unaffordable: Depending on how much a cash-out refinance increases the loan balance, it could become unaffordable for the remaining spouse, creating financial hardship after the divorce is finalized.
- Remaining party on the hook for selling costs: When the spouse planning to stay in the house sells it down the road, they'll be able to enjoy any appreciation in the home's value but will also need to cover selling costs on their own.
Continue to Co-Own the House
If the divorce is amicable and both parties can manage to co-own the house, they could agree on what's called a deferred sale of the home. Potential scenarios include:
- Waiting until the youngest child has graduated from high school.
- Waiting until the remaining spouse can refinance the loan and buy out the other party.
- Agreeing to wait until the remaining spouse is ready to sell with no set deadline.
This option could be appealing if the market is less attractive for sellers, one spouse needs time to build their credit or increase their income, or both parents want to maintain stability for their children without an immediate buyout. They should also discuss the mortgage loan and how it might impact both parties' credit, especially if only one spouse is on the loan.
In all cases, both parties need to come to an agreement about the mortgage payment, property taxes, insurance, maintenance, repairs and other costs.
Pros of Continuing Co-Ownership
- Maintains stability for children: As with a buyout, co-owning the home after divorce allows parents to maintain as much stability as possible for their children during an otherwise tumultuous experience.
- Costs and profits are still shared: Co-ownership allows both spouses to share the appreciation the home experiences and also the selling costs when the home is eventually sold.
- Provides more flexibility: In the event of a down market, a deferred sale could allow both parties to wait until a more beneficial time so they can maximize their gains.
Cons of Continuing Co-Ownership
- Lower tax exclusion: If you wait until you're officially divorced to sell the home, each spouse will only get up to $250,000 of gains excluded from their income. Depending on your individual tax situations, it could impact one party more than the other.
- Can be complicated: This approach requires a lot more communication (and cooperation) than the other two, which makes it less appealing or even impossible if one or both parties are hostile toward each other.
- Could impact the moving party's housing prospects: If the spouse who's moving out is on the mortgage loan, it'll remain on their credit report even if they're not the ones making payments. When it comes time to buy a new house, they may run into some problems getting approved.
Protecting Your Credit in Divorce
With or without a marital home, divorce can have an impact on your credit. As such, it's crucial that you monitor your credit regularly and make sure that any shared debt is paid on time to avoid negative items on your credit reports.
Also, depending on how you decide to handle the marital home, it's important to consider how taking on a larger loan or keeping a loan on your credit reports, even if you're not still living in the house, can impact your credit history and limit your access to credit in the future.
Take time to discuss these options and their potential effects with your soon-to-be-ex-spouse to determine a path that works best for both of you.