Whether you’ll be forced to sell the house in divorce (or can force your ex to sell the house) depends on your individual circumstances.
In most cases, a home is one of the biggest assets a couple owns, so it can also create the biggest disagreements about how it should be divided in a divorce.
Fortunately, there are several possible ways to go about this.
Again, it all depends on your situation. Some couples may need to get the cash from the sale of the home immediately or as part of a settlement agreement. Others may be able to work out a deal that allows one spouse to keep the home going forward.
It’s a process that needs to be fully thought out so that both parties can exercise the maximum benefits for their own personal situation.
Two main reasons why someone might be forced to sell the house.
Most couples are forced to sell their home outright in divorce either when one spouse is not able to buy the other one’s interest or when spouses cannot agree on the value of the house and the only way to settle the issue is to sell the home for what the market will bear.
But there are a variety of options that can be considered when trying to figure out what to do with the family home.
Many spouses choose to simply sell the house outright immediately and split the net equity generated by the sale.
In cases where there are enough resources, one spouse can actually keep the property through a buy-out of the other spouse’s interest in the home.
Typically, this will require the spouse who keeps the home (known as the in-spouse) to come up with a lump sum to pay off the spouse who is selling (known as the out-spouse). This will allow the in-spouse to keep the home and is common when the in-spouse wants to maintain continuity of a home for children who are involved.
Depending on the degree of cooperation, there are also instances where both spouses can continue to co-own the house. This means that the house can be sold at a later mutually agreed upon date, either when children are grown or when market conditions are more favorable.
How do I access my house equity?
One of the reasons that a couple might be forced to sell their house in a divorce is because there’s not enough liquidity. This means that neither spouse has enough other assets or cash to buy out the other spouse’s interest.
If selling the house is not the most desirable way to proceed as a way of cashing in on the equity, the other option is to refinance the first mortgage.
One spouse can take out a new mortgage that is more than the amount of the current mortgage. The difference in those loan amounts would be funds that could then be used for a buyout of the other spouse.
Instead of refinancing, another option might be to add a HELOC (Home Equity Line of Credit) to the existing mortgage. It allows one spouse to access funds that can also be used for a buyout.
Accessing home equity can also be used for several other reasons as well.
It can be used to consolidate debt, kept as a source for liquid reserves or to be used for other divorce-related expenses. In short, it can be used as a flexible source of funds to solve a number of financial challenges in a divorce.
What if one person wants the house but can’t afford it?
Instead of selling, if one spouse wants to keep the house and can afford to do so, there are a couple of ways to go about that process.
One way is to transfer the title. In this case, the out-spouse signs an interspousal transfer deed transferring title to the in-spouse. The in-spouse would then use other sources of funds such as cash reserves, retirement accounts, or other property to negotiate and complete the buyout.
The one caveat is that the in-spouse will still need to refinance the mortgage if the loan is currently in both person’s names. The refinance will need to be accomplished using the single spouse’s ability to refinance on their own because the out-spouse will not want to keep their name on a mortgage of a property they no longer own.
What about a deferred sale?
There is a good alternative to being forced to sell the house now – a deferred sale.
A deferred sale is also known as a temporary delayed sale. In some cases, it is a viable option for couples getting a divorce.
This strategy makes a lot of sense when there are children in the marriage and both spouses are committed to trying to maintain a degree of normalcy in their lives. In this case, the custodial parent would stay in the house and enjoy exclusive use of it while raising the children. The house would be jointly owned by both parents until a sale takes place sometime in the future.
Although the out-spouse does not get any equity from the house at the time of the divorce because no sale or buyout has happened, this is offset by the fact that they get to continue to share in any appreciation the property experiences while they still own it.
Taxes and Selling in Divorce
There is an important rule relating to the tax consequences of selling a house in a divorce.
To qualify for a tax exclusion on the sale of a primary residence you need to meet the ownership and a use requirement.
First, you need to have owned the house for two of the last five years and you must also have used the house as your primary residence for two of the last five years.
If you agree to co-own a house after the divorce, then both spouses meet the ownership requirement.
Many people assume that if only one person was using the home and five years pass, then the spouse not living in the home will not meet the primary residence requirement.
However, as long as the in-spouse is awarded exclusive use of the house as part of a final settlement agreement or a separation agreement, they the out-spouse can be treated as if they had also used the house as their primary residence as well.