Selling a Home During Divorce: What to Consider
Selling a home as part of the divorce process can be an experience fraught with serious financial consequences. This guide outlines the basic concepts people going through divorce should know before they sell their homes, concerning the definition of ownership, the division of assets, tax liability and how to decide when to sell.
For the purposes of determining how the couple can or should decide to sell the home, it is important to establish ownership. Ownership of a home where both parties have lived for a significant period of time (at least two years, for tax purposes) is usually defined by the state.
In a state following common laws, a person who purchases a property alone in their own name is considered the sole owner. Most states obey common law standards with a few caveats. For example, if the non-owning spouse lives in the home for some years and contributes to the active appreciation of the property, that person may retain a financial interest in the profits from the sale.
Other states, such as California or Washington, follow community property standards. Community property laws state that all property obtained during the marriage is equally owned by each party, regardless of the name on the deed. This also applies to income and debts. As such, a property purchased by one person and used by both parties will be considered legally owned by both parties. However, couples can transcend some of these policies, usually with a prenuptial or postnuptial agreement.
Division of Assets
The way that the proceeds of the sale of the home are divided depends on the mortgage debt, any other liens on the home (e.g. for unpaid property taxes), and the terms of the divorce. In many cases, profits are split evenly between the two parties. There may be specific exceptions made for people who have invested more into the home during the divorce process, or who have shouldered more of the mortgage payments while the divorce is finalized.
Capital Gains Taxes
Whenever a home is sold, there is a question of tax liability on the gain between the sale price and the property’s original price when the couple purchased it. With a couple that is "married filing jointly," they may exclude up to $500,000 of the profits from their tax liability if they have owned the home for at least two years and have each lived in it for two of the last five years.
Once the divorce is complete, the tax exclusion depends on each person’s qualification for the exclusion. If one party meets the requirements and the other does not, one may be able to exclude up to $250,000, while the other could only claim a portion.
When to Sell the Home
There are several reasons that divorcing couples choose to push up or delay the sale of a shared home, and most of them relate to finances.
For many people, selling the home before the divorce has gone through has some monetary benefits, related to liquid assets as well as tax liability. If the couple has been living together in the home for many years, there is no worry that either party will fail to meet the requirements to qualify for the full exclusion of $250,000 per person for capital gains taxes. The sale of the home and the splitting of the proceeds may also provide funds for each person to pay off debts and obtain other housing.
Divorce can be an expensive process, and people may find themselves accumulating quite a lot of debt in lawyer’s fees and the splitting of expenses over time. Selling the home during the divorce, but before it is complete, provides some protection for both parties. It can help to fund a long divorce process, especially when there has been a great deal of negotiation to find a fair settlement. If the home is sold before a divorce or a separation has been finalized, the couple may also choose to file their taxes as "married filing jointly" to minimize the tax liability related to the sale.
Many couples, especially those with children living at home, might decide to wait to sell the home until a more ideal time. In some cases, the person who remains in the home after the divorce is finalized will buy out the other person’s interest in the home, so that the sale can be clean. Other couples decide to have both parties still making payments on the mortgage, occasionally as a way to meet alimony or child support obligations. If this arrangement continues for more than three years before the sale is complete, however, the party no longer living in the home may be liable for a greater portion of capital gains taxes after the sale.
It can be somewhat difficult to determine how to approach selling a home during or after a divorce. With this guide, it is easier to understand the financial obligations related to a home sale during divorce.
Ultimately, it is up to the couple to decide when is the best time to sell the home and settle the proceeds. In some instances, it may be mandatory to achieve a fair division of assets. Both parties should be aware of their financial obligations in all cases before they make a firm decision.
Justin Havre is a Calgary native and owner of Justin Havre & Associates.