What Happens to the House in a Divorce? 4 Options and Key Considerations

Deciding what to do with the marital home is a critical step in the divorce process. The best option depends on your financial situation, state laws, and personal goals. The four primary paths are: one spouse keeping the home via a buyout, trading other assets of equal value, continuing to co-own the property, or selling the home and splitting the proceeds. This guide outlines the financial and legal implications of each choice to help you make an informed decision.

How Do State Laws Determine Who Gets the House?

The classification of your home as marital property or separate property is the foundation of how it is divided. Marital property generally includes assets acquired by either spouse during the marriage. The division process is heavily influenced by whether you live in a community property state or an equitable distribution state.

• Community Property States: In these states, including Arizona, California, and Texas, most assets and debts acquired during the marriage are owned equally (50/50) by both spouses. A key exception is property owned by one spouse before the marriage. However, a spouse may still have a claim to the increase in the home’s value during the marriage.
• Equitable Distribution States: In the majority of states, assets are divided "equitably," which means fairly but not necessarily equally. A judge may consider factors like each spouse's income, financial contributions, and future earning potential when deciding on a division.

A prenuptial (pre-marital) or postnuptial (after marriage) agreement can override these default state laws by specifying in advance how assets will be divided.

What Are the Options for the Marital Home in a Divorce?

1. Asset Division and Buyout

If one spouse wishes to keep the house, a buyout is common. This involves the keeping spouse paying the other for their share of the home’s equity. In a community property state, this is typically 50% of the current market value. In an equitable distribution state, the amount may be different based on a judge’s ruling or mutual agreement.

Why consider this route? It provides stability, especially for children, and allows one person to maintain ownership without a forced sale. Keep in mind: The buying spouse must qualify for a mortgage on a single income and have the funds for the buyout, which can sometimes be rolled into a home refinancing.

2. Co-Owning the Home After Divorce

Some divorcing couples choose to remain co-owners for a period. This requires a detailed legal agreement covering mortgage payments, maintenance costs, and a timeline for eventually selling the property.

Why consider this route? It can allow children to remain in the home and is a solution if a buyout isn't immediately feasible. Keep in mind: Both parties’ credit scores remain tied to the mortgage. Additionally, the IRS primary residence capital gains tax exclusion requires owning and living in the home for two of the last five years. A non-occupying owner may lose this valuable tax benefit when the home is sold.

3. Selling the Home and Splitting the Proceeds

Selling the house is often the cleanest financial break. After the sale, proceeds are used to pay off the existing mortgage and selling costs, with the remaining profit split according to your divorce settlement or court order.

Why consider this route? It provides both parties with liquid cash to start anew and closes a joint financial chapter. Keep in mind: To avoid capital gains taxes, you typically must have lived in the home as your primary residence for two of the five years preceding the sale. The IRS allows an exclusion of up to $250,000 in profit for a single filer or $500,000 for a married couple filing jointly.

What Are the Key Financial and Tax Implications?

The timing of the sale can significantly impact your taxes. Selling while still technically married may allow you to claim the $500,000 joint-filer capital gains exclusion. If you sell after the divorce, each ex-spouse can still claim their $250,000 exclusion if they meet the residency requirement. It is critical to consult a tax professional to understand the best strategy for your situation.

To successfully negotiate the sale, couples must agree on:

• Hiring a real estate agent.
• Setting a listing price.
• Deciding on home improvements before the sale.
• How to handle mortgage payments while the home is on the market.

What Is the Best Timing for a Sale?

Based on our experience assessment, timing the sale strategically can maximize profit and minimize stress.

• Market Conditions: Selling during a seller's market can lead to a quicker sale and higher offers.
• Personal Timing: If children are involved, selling during summer break can ease their transition. Finalizing the sale before a prolonged court battle can also save significant legal fees.

The most advantageous path is typically the one you and your spouse can agree upon outside of court. A negotiated settlement gives you control, while a court decision introduces cost and uncertainty. Always seek advice from qualified legal and financial professionals to protect your interests during this process.