Three Ways to Split the House in Divorce

Three Ways to Split the House in Divorce
By Carol Ann Wilson, CFP, CFDP

1. Sell the house and divide the profits that remain after sales costs and the mortgage is paid off. It is important to consider the basis in the house and possible capital gains. Also, if your client wants to buy another home, determine if he/she will be able to qualify for a new loan

2. One spouse buys out the other spouse's interest in the house. This can be done by trading another asset for the interest in the house.

The first step is to determine the value of the home. An appraisal should be done. The fair market value of the house minus the mortgage will show the equity in the house.

What if the wife decides to keep the house and she finds within a short time that she cannot afford to keep it and she puts it up for sale? Should you consider subtracting selling costs and capital gains taxes from the value in the beginning? These are issues that definitely should be considered.

What if the wife wants to keep the house and there is not another asset to offset the value? She could refinance the house to withdraw enough cash to pay off her ex-husband. But that means she now has a higher mortgage payment. Can she afford a higher payment?

Instead of refinancing the house, she could owe a sum to her ex-husband, which is paid off over time (a property settlement note). A note should include reasonable interest, and it should be collateralized with a deed of trust on the property. A problem with this arrangement is that it keeps the ex-spouses in an uncomfortable debtor-creditor relationship.

Another problem with buying out the other spouse's interest is that the non-owner spouse's name stays on the mortgage. Even though the husband may quit-claim the deed to the wife, his name remains on the mortgage. If she decides to stop making the payments, he is still liable. This may impact his credit.

3. One spouse keeps the house for a certain time period, say until the children are out of school, and then the house is to be sold and the proceeds divided. This creates a tie between the ex-spouses that they may not want. But is does allow for the "out-spouse" to be able to also take a $250,000 exclusion from capital gain.