Saturday, November 19, 2022

6 Things To Consider When Selling A House During Divorce

As someone who owns a house and is in the last stages of the divorce process, the one in which we take care of our assets including a jointly owned house, this post on things to consider regarding the sale of a house during divorce is very apt. I hope you find it as enlightening.

If you and your spouse are contemplating a divorce, you may find yourselves wondering whether to sell your home. Especially if the value has risen in recent years, as most properties did, you could find yourself sitting on a substantial amount of equity. Those funds can help both parties start fresh, find new housing, and begin their new lives.

However, divorce proceedings can complicate everything, and this is no exception. Before you take steps to prepare to list your home for sale during a divorce, consider these six questions.

Should you even sell the home in the first place?

Your options aren’t necessarily restricted here. Divorcing parties may choose to sell the home or homes, or to have one spouse buy out the other. What makes most sense to you and your family can usually be accommodated, as long as both parties are willing to be fair and negotiate in good faith.

This is one strong reason in favor of hiring a competent local divorce attorney—the attorneys can negotiate and discuss options without the emotional entanglement the divorcing spouses naturally experience.

Who owns the property?

In many cases, you’ll be selling after the case is filed, with the blessing of the court. If you’re selling in anticipation of a divorce that hasn’t been filed yet, it’s smart to talk to your attorney because there are a lot of factors that can bear on the validity of the sale and the division of proceeds, when deciding who owns the property in question. For example:
  • Is there a prenup or postnup agreement in place?
  • Was the property acquired by one party in their name alone? If so, was it purchased during or before the marriage? (If the other spouse lived in and contributed to the property’s upkeep and improvement, they may be entitled to some of the proceeds, regardless of whether they’re on the deed.)
  • Are you in a community property state? In states such as California, Arizona, Idaho, and others, both parties in a divorce own all the assets and liabilities equally, regardless of who’s on the deed. However, there are some exceptions to this general rule.

These exceptions and factors are additional reasons why it’s important to have the input and guidance of an experienced divorce attorney. Your lawyer can help you sort through the legal requirements to make sure a sale is valid and the proceeds properly divided.

How should the sale proceeds be divided between the parties?

How much you’ll get as a party to the divorce case depends on a lot of factors. Existing mortgage debt and any other existing liens (i.e., unpaid taxes, etc.) must be satisfied out of the proceeds, with the leftover balance representing your total equity in the property to be divided according to state rules, the court’s orders, etc.

Of course, court orders only apply if your case ends up going to court seeking a decision about division of marital property and proceeds from a judge. Alternatively, you and your soon-to-be former spouse can amicably negotiate any kind of final settlement you like, including when and how to sell the house and divvy up the proceeds.

Will you own capital gains tax on the sale?

This depends on the difference between your basis in the property (that is, the amount you paid for it originally) and the amount you’re selling it for right now. If the property was purchased several years back, you could be sitting on a significantly appreciated amount of equity. How much you’ll need to pay in capital gains tax on that difference depends on your filing status and other factors.

For example, when a married couple who files jointly sells a home, they can exclude up to $500,000 of the profits from the property sale from their tax liability. If they’re divorced, they must each meet the qualifications for the exemption, including how long they’ve resided in the property before the sale. If they qualify, they can claim up to $250,000 of profit each.

When should you sell the home?

As with so many things, timing can have a huge impact when you sell your home during a divorce.

Selling before the divorce usually means both parties will qualify for the capital gains exclusion since both have been living there for the requisite amount of time. You can also close sooner, agree on the division of proceeds, and thus give each party their portion of funds with which to start over and obtain new housing.

During the divorce, you may accumulate substantial legal fees on both sides. Home sale proceeds can be used to reduce that obligation, but might mean you’re not able to take care of other expenses associated with dividing up a household.

Many couples with younger children elect for one spouse to stay in the home with the children to minimize disruptive impacts on them, and either buy out the other spouse’s interest or have the other spouse continue to pay half the mortgage against child support or alimony obligations. Remember however that merely executing a quitclaim deed to remove one spouse’s name from the deed won’t remove their financial and legal obligations if they’re included in the mortgage. That will require the purchasing party to refinance the home in their name alone. 

How do you manage the sale process?

In some ways, selling during a divorce is just like selling at any other time, except there are additional layers of complexity and additional communication that need to be managed. Each party and their lawyer must be kept apprised of offers that come in, and the spouses must agree on how to respond to any specific offer. This can create a great deal of stress while the home is being listed and shown, in addition to all the stress that comes with a divorce.

If the parties can’t agree, the court may have to be involved, which can slow the process down and impact the sale. For that reason, if you and your spouse can reach an agreement between you, that’s almost always the fastest and simplest route to a quick closing.