Your home is an extremely valuable asset – and it may be the most valuable asset that you possess. When you divorce, that asset must be split according to the terms of your settlement. But how?
Reaching agreement on how it should be divided can be painful, even in a community property state like California. But if you’re diligent, you can get through it with few delays and a minimal amount of stress.
As part of that process, here’s what you need to know about transferring the house title as part of your divorce.
What are the steps for dividing real estate between spouses as part of a divorce?
Although there will be some differences and nuances when dividing real estate as part of a divorce, the general framework for this type of transaction is basically the same.
Before you start the transfer process, you need to confirm who is currently on the title to the property. Just to be safe, you shouldn’t automatically assume it’s just you and your spouse that hold title to the house. In some cases, the title may have changed throughout your marriage, and you need to be sure about the current authenticity and accuracy of the property title before you can move forward with a transfer.
You can hire a real estate lawyer or a title search company to verify the information for you. It might be easier than attempting to do it yourself, because public records can be complicated and confusing, and you can’t afford to make mistakes.
However, if you do decide to verify the title on your own, you’ll need to go to the county recorder’s office in the county where the property is located. The recorder is responsible for maintaining records such as deeds and other documents that affect title to the property.
Once you have found the records for your property, you’ll want to confirm that you and your spouse are the only ones who hold legal title to that property. Be sure to check the chain of title to confirm it was done legally and properly.
You’ll also want to check and make sure there are no encumbrances on the land. This might include liens, covenants, easements, unpaid taxes, or mortgages.
Then, determine how you want the title to be held going forward.
If transferring before a divorce, the spouse will need to hold title as “married man/woman as their sole and separate property.” If transferring title after divorce, the spouse can hold the title as “Unmarried man/woman.”
Once you have decided how the property is to be divided, you’ll need to create a new deed to transfer the property. That new deed will need to be submitted to the city or the county where the property is located so that it can be recorded.
The deed must be in writing and must list the spouses involved in the transfer. The property must be identified using an address or a legal description. It will need to be signed in front of a notary public to be legal.
You’ll also keep a copy of the recorded deed to prove that you own the property.
Defining how a married couple can hold title to a property
In a marriage, two people typically hold title to a property, either as tenants in common, joint tenants, or tenants by entireties. When this is the case, both must agree to sell, mortgage, or will the property.
In most cases, a married couple will hold title to a property either by joint tenancy or tenancy by the entireties. Ownership by tenancy in common is less frequent.
- Joint tenancy. You and your spouse own the property together, and if one of you dies, the property automatically goes to the surviving spouse. This is also often called joint tenancy with rights of survivorship. Joint tenancy can be used any time two or more people own property and is not limited to spouses.
- Tenancy by the entireties. The same as joint tenancy, but only applies between spouses and is not used in all states.
- Tenancy in common. Also used when two or more people own property. However, if one of the owners dies, that person’s interest in the property goes to his or her heirs and not automatically to the other owners.
What are the different ways I can transfer ownership
There are multiple ways to transfer property ownership in a divorce. All of them involve changing the deed, which is the ownership document that legally defines who owns the property. By changing the deed, you can change who owns the property.
Transferring the title gives one spouse sole ownership of the property. After the fact, they are free to sell, mortgage, or place it in a will or trust to give the property to any person he or she desires.
The specific documents you need to have prepared and signed will depend on which type of transfer you choose. Regardless of the method, all deed paperwork needs to be signed in the presence of a notary public.
Two of the most common ways to transfer property in a divorce are through an interspousal transfer deed or quitclaim deed.
When spouses own property together, but then one spouse executes an interspousal transfer or a quitclaim deed, this is known as transmutation.
Interspousal Transfer Deed
This type of deed transfers the title of a property between a married couple. It can be used to avoid tax liability when transferring property. Usually, when the title to a property is transferred, the county may impose a transfer tax and reassess the value of the property, leading to potentially higher taxes.
An interspousal transfer deed is exempt from transfer taxes and is a cost-efficient way to transfer property between spouses.
Other than divorce, interspousal transfer deeds are often executed when spouses are looking to refinance a house, but one spouse has bad credit, this jeopardizing loan approval.
In cases where the house is separate property, it can be turned into marital property by executing an interspousal transfer deed and adding a spouse to the deed.
This type of deed transfers whatever interest a spouse has in a property to the other spouse. The main difference between a quitclaim deed and an interspousal transfer deed is that a quitclaim deed comes with no guarantees about property ownership.
With this type of deed, you get no guarantees about ownership of the property. You get the title strictly “as is.”
This process is quick and straightforward. Many people are capable of doing this on their own. Forms are readily available online or at an office supply store. After you complete the form, sign it, have it notarized and record it at the county recorder’s office.
When a spouse uses a quitclaim deed to give up his or her interest in the house, they may still be responsible for half of the mortgage debt because liability can’t be transferred through a quitclaim deed.
You need to know that a deed and a mortgage are two different things.
Also, if you sign a quitclaim deed, you are forfeiting the right to sell and profit from a sale of the home in the future.
The Preliminary Change of Ownership Form
In addition to deed paperwork, you will also need to sign a Preliminary Change of Ownership form (PCOR). This document must be filed with each conveyance in the County Recorder’s office for the county where the property is located in all 58 California counties.
This form is filed with the State Board of Equalization and is used to determine the taxation of real property so that the appropriate tax is attached and collected by the tax collector’s office. It’s critical to fill out and submit this form promptly.
When information changes on the grant deed, new owners have a limited deadline from the date of transfer to submit documentation.
When a transfer takes place between spouses, taxes, and assessed value will not be changed, but you still need to inform the state that this is the case.
If you fail to do so, you could be subject to a $5,000 fine for your principal residence or a $20,000 penalty for any property that is not your principal residence.
Who prepares these documents?
Typically, you, an attorney, or an escrow office will prepare property transfer documents.
Forms for California quitclaim deeds vary from county to county. Be sure to get the form from the county where the property is located.
It’s probably better to have a professional prepare the paperwork since self-prepared deeds may not always be insurable. An uninsured deed is a deed that has not been examined by a title company. This can be a problem when trying to sell or refinance in the future.
If the spouse who retains an interest in the property wants to do either of these at some point, the ex-spouse who was removed from the title may need to sign an uninsured deed affidavit to verify that the transfer was voluntary, valid and authentic, free from any coercion or duress.
A title company or an escrow company can prepare a version of the affidavit that will then need to be signed and notarized.
How long does a house transfer take?
The change takes effect immediately as soon as the county recorder’s office receives the signed and notarized documents. You will have to pay a filing fee, which varies from county to county and may run as high as $150.
Are there tax consequences of transferring ownership?
It depends. Most counties in California do not levy a transfer tax for transfers between spouses.
The same applies for reassessments, which are also done at the discretion of the tax assessor’s office. However, typically, a reassessment is not triggered when a title transfers between spouses. This means generally, there are no immediate tax consequences to either party.
Also, IRS Code Section 1041 allows any-spouse to-spouse transfer of property that is related to the divorce to be tax-free. That means a lump sum payout, transferring titles, refinancing, and buying out the other person’s interest can be treated as tax-free transactions. Be aware that rules are different if third parties are involved.
Things can be more complicated if an ex-spouse later decides to sell the property he or she received in a divorce. When the property appreciates post-divorce, the seller may owe capital gains taxes.
There are special tax rules apply to the sale of houses after divorce to help divorced homeowners avoid paying capital gains taxes.
In most cases, a person selling his or her home after a divorce can exclude up to $250,000 in capital gains if he or she has owned and lived in the house as a primary residence for at least two of the last five years. The two-year time frame is cumulative.
Also, to be eligible for the exclusion, the seller must not have excluded capital gains on the sale of another home in the past two years.
There are some instances when property transfers between spouses may trigger income tax liability in California. To avoid these types of obligations to the Franchise Tax Board or the IRS, it’s best to consult with a CPA, financial planner, or a tax attorney to make sure you don’t wind up with any unintended financial consequences.
How does a deed transfer affect a mortgage?
Even if you transfer your interest in a property to the other spouse, if you and your spouse were both obligated on the mortgage, you will still maintain that obligation.
Ownership and debt are treated as two separate issues. Transferring title to a house does NOT transfer the mortgage.
Part of the resolution to this will be in the settlement agreement. If one spouse is awarded the property, that spouse may also be ordered by the court to pay the mortgage and other related house expenses, such as taxes and insurance.
In other settlements, both spouses may be obligated to share in the payment of the mortgage and expenses (especially if children are involved), or if one party is awarded the property, the other spouse may still be responsible for the mortgage and expenses.
If the other spouse is obligated to pay the mortgage as part of the settlement agreement, you can contact the lender, provide proof of the changed obligation, and see if they will release you. That isn’t always the case, though. That’s because if your ex-spouse defaults on the mortgage, the lender can still take action against both of you.
You can go back to the court that granted the divorce, and even though the court can’t release you from the mortgage, it can order your ex-spouse to reimburse you for paying to the lender or re-structure the property division settlement to compensate you.
You may also try to structure a settlement agreement in such a way that a spouse must either sell the home or refinance it immediately after the divorce to remove you from the mortgage obligation.
Should I transfer ownership before the divorce is final?
There is no absolute right or wrong answer to this question. Much of this has to do with the level of trust you have between you and your spouse. If your divorce is amicable, then you might be okay in moving forward before a divorce is final.
But in cases where there are disagreements, or negotiations turn sour, if you have already transferred title, you are giving up crucial negotiating leverage.
Consider consulting with a family law attorney to decide what the best course of action is for your case.