Divorce is not easy. It’s an emotional and stressful time for everyone involved. We are here to help.
Did you know that selling your home during divorce can potentially save you money on capital gains tax as long as you sell while you're still legally married?
You're eligible for an exclusion up to $500,000 while legally married. Once you divorce that exclusion drops to $250,000. You can read more about tax strategy below.
Let's get one thing straight before we dive into this article.... Just because you're going through a divorce does not mean you have to sell your house, even if you want to sell, you should seek expert advice to find out if it's a good time to sell, the market shifts fast.
In this article we are going to answer some of the most common questions about selling a home during divorce. Below you can click to jump to any topic:
- Divorce Statistics
- How to Sell during Divorce?
- Can you Sell House to Spouse?
- How to keep your House when Separating?
- Can you Rent House to Spouse?
- Should I Sell Home Before or After Divorce?
- Who pays the Mortgage during Divorce?
- What are the Taxes involved when Selling?
- Buy a Home During Divorce?
Are you aware of the divorce laws in your state? In my local market, here in Raleigh, NC, the divorce laws require you to be separated for one year and one day before a divorce can be granted. This means one person in the relationship will need to find a new place to live for a year. During this time, you'll have a lot of questions regarding who pays the mortgage, and maintenance on the house.
Most couples who are splitting apart will be forced to sell their home for financial, personal, or legal reasons. The house likely holds a lot of your equity, and is often your greatest asset. So take your time reading this article and drop us a comment if you have any questions.
It’s easy to understand why some people get divorced and it’s more common than most people may realize:
Around 50 percent of marriages in the United States end in divorce. The number is high in many other developed nations as well.
Divorce Statistics by number of marriages:
41 percent of first marriages end in divorce.
60 percent of second marriages end in divorce.
73 percent of third marriages end in divorce.
If you decide, or are forced to sell your home during a divorce, you have to understand that you are going to truly be tested emotionally. Neither divorce, nor the selling of your home, are easy. The divorce and sale together make things even more challenging on you.
One of the hardest parts of divorce is the sale of your home.
A home holds sentimental value, whether you are going through a divorce or not. Sometimes it’s better to rip the band-aid off and move on, and sometimes it’s better to do your best to hold onto it. There are a number of reasons to consider and we are going to go over them in this article.
Once you decide whether or not the reasons make sense to keep or sell your home, you should do your best to commit to that decision.
Selling a home during a divorce holds one major difference than a typical sale… you have to figure out who is going to get what before you sell. Whether it’s the furniture, the electronics, or the money from the sale the hardest part is going to be figuring out who walks away with what.
You will want to consult with an attorney. The attorney is the mediator who will help you through dividing up possessions and equity so that it is fair. Before you contact a Realtor you will need an understanding of who is going to walk away with what after the sale.
A Realtor can help you to determine how much your home is worth and at what price you will see your greatest return on investment. Having a general understanding of the value of your home should give you a ballpark estimate of the equity you’ll walk away with.
A divorce can impact the sale of a home in a number of ways, which makes it important for you to understand these ways ahead of time
Negotiating a spouse buyout on your home is not as complicated as it sounds upfront. Down the line is where it gets tricky. The home is likely going to appreciate or depreciate, and this is where it gets tricky. Depending on which way the home goes one party is going to be upset that the other one made more money. Each party bears risk and you should understand this upfront, it can go either way.
Often times the custodial parent will be the one to continue living in the house, and this can be a great way to provide stability for the kids in a time where this so much change.
Often times the buyout will be included in the separation agreement in which one party will sell the house to the other. The buyout of the house is completed as a part of the divorce settlement. This can be accomplished by refinancing the house and taking out a new mortgage loan, or giving up other assets that are t he equivalent to the price of the selling spouse's share. If there are other marital investments or retirement accounts, these can be used to settle the interest the selling party has in the home.
If neither party wants to sell the house, there are ways in which you can rent the house to your spouse.
There are several ways one spouse can continue to keep the house while separating. A spouse buyout is the likeliest of scenarios, however there are other ways in which you can keep your house.
One way you can keep the house is 'rent' it from your spouse. Basically you will be paying their portion of the mortgage and they will be entitled to an interest in the house. It's likelier a better scenario that you buy your spouse out, however a divorce is expensive so you may have to work out a payment plan, or sell off other assets.
You can rent it out to another family and continue to pay down the mortgage on the home. You will want to make sure you're prepared to be a landlord and it's likely any profits or income on the home will be split both ways. It may make more sense to use a property management company that can divide everything equally between spouses.
Keep in mind being a landlord is not easy. It's even more difficult when it's a property that you own with a former spouse.
Renting your house to a spouse is one way to keep it. Everything needs to be put in writing because there is a lot of uncertainty as to who pays what, do you split the costs for expenses (new roof, new HVAC, etc?), this all needs to be determined in writing before an agreement is made.
Keeping the house is likely the motivating factor why you are exploring the option of renting the house from a spouse. While it's not recommended it can be done. Before you decide to rent it out to your spouse, or rent it from your spouse, you need to be honest with yourself. Is this something you think can work?
If you cannot afford to buy your spouse out, renting it out from them is a great option in which you are theoretically setting up a payment plan that allows you to hold onto the house until you can afford to buy the 'interest' your spouse has in the house.
Should I Sell Home Before or After Divorce?
Before you divorce is likely the best scenario for selling your home during a divorce. It's important to meet with a local Realtor, an attorney, and let them know every detail of your situation so they can play out the results with you. You want to walk away from the sale of your home with as much money as possible, and this means you will want to share everything with your team. They are here to help you.
Selling a home before a divorce makes sense because there are some tax breaks being a legally married couple gives you. For instance, you are eligible for a $500,000 exclusion in capital gains taxes if you've owned the home and live there for at least two years. Your tax strategy is going to play a big part in whether or not you decide to sell your home before or after divorce.
Let's talk a bit more about the role taxes play...
Capital Gains Taxes are worth paying attention to when selling your house during a divorce. The reason being that as a legally married couple you are eligible for a $500,000 tax exclusion, while individually you're only eligible for a $250,000 tax exclusion.
Your tax strategy when selling your home can have serious financial implications, upwards of tens of thousands of dollars in some cases, so it's important you educate yourself with good information on the topic.
You will want to familiarize yourself with how capital gains taxes work.
Capital gains tax is a tax on the profits from sales of property when the gains exceed a certain amount.
You will be paying capital gains on any profit you make UNLESS you have lived in the home for at least two of the five years prior to the sale. The home must be your "principal residence." Additionally, you will only be eligible for up to a $250,000 gain from your taxable income if you are separated. If you are legally married than you are eligible for up to $500,000.
Keep this in mind, because selling your house while you are still legally married, BEFORE the divorce is official, could save you a lot of money. If you have any questions please feel free to email us with your scenario.
The best piece of advice I can give is to be wary of the amount of risk you take on in this process.
Put everything in writing and do not allow anything to be a verbal agreement. It could come back to haunt you. Nothing surprises me anymore when it comes to people, especially when it's during an emotional time like divorce. You may see a side of your spouse that you've never seen before, it's important to not change who you are and what you stand for during this period. Emotions drive actions, and you don't want to react to anything you haven't thought through logically.
During a divorce, someone may decide to keep the house, and in this case the questions revolve around the mortgage. If you are both on the title and both on the mortgage you have to be careful, especially if you're the spouse walking away from the house. You're subjecting yourself to some risk here.
What happens if your spouse doesn't make payments? How will that impact you since your name is tied to the house?
Paying your spouse could be a bit riskier than paying the mortgage, your spouse may take that money and use it for something completely different than paying the mortgage.
Whatever you decide to work out with your spouse you need to make sure it's in writing and has been reviewed by a divorce lawyer.
Hi there! I'm Ryan Fitzgerald, a REALTOR in Raleigh-Durham, NC and the owner of Raleigh Realty. Chances are you and I share a similar passion, Real Estate! I also have a passion for building businesses, working out, inspiring others, technology, sports, and people. Connect with me on Facebook and Instagram!