The home that a married couple purchased and lived in during married life is usually the most significant asset, both financially and emotionally, that a couple must address during a divorce. How do you decide what to do with the house? There are many factors and issues that each spouse must evaluate before deciding what will happen with the family home.
Community or Separate Property
The question of who owns the home must be answered before determining what happens with the house. In California, assets acquired during marriage are considered community property and will be divided equally in a divorce. If a spouse bought the home prior to the marriage, then the home is presumed to be that spouse’s separate property. However, the situation can become complicated if the other spouse makes mortgage payments for several years during a longstanding marriage. The most straightforward situation is when the couple purchased the home during marriage with community property funds and both are on the title.
Options and Factors to Consider
If the home is community property, then there are three main options for what to do with the home: maintain the current ownership/title; sell the home and split the proceeds; or “buy out” the other spouse. Because the emotional and financial implications often hinder a couple’s ability to reach an equitable decision regarding the home, an already difficult decision becomes the most contentious aspect of the divorce. Nonetheless, the home, just like other marital assets, can be part of the spouses’ agreed-upon separation of property and debts.
The financial reality and tax consequences may ultimately lead to a decision that neither spouse prefers. Because emotional, practical and financial factors all impact the decision, both spouses must understand all the options and the implications before deciding what to do with the house. If the couple is not able to resolve the disposition of the home, then the judge will decide.
Do we have to sell the house?
No. If one spouse wants to remain in the house, then there are options. When the couple has significant assets, the house may be awarded to one spouse and other assets of equal value to the other spouse. Or, one spouse can “buy-out” the equity of the other spouse, basically purchasing the home from the other.
Who pays the mortgage?
Who pays the mortgage depends upon what the couple decides to do with the house. If one spouse would like to remain in the home, then that spouse can assume the mortgage (if the bank allows) and the other spouse will be removed from the mortgage. Another option is for the spouse remaining in the home to refinance the home in his name only.
If assuming the mortgage and refinancing are not options and the spouse living in the home cannot afford the payments, then the other spouse may agree to directly pay the mortgage, especially if there are children involved. In some instances, if the spouse does not have sufficient income to make the payments, then the amount of the mortgage payment might be added to the alimony or child support payment. These options can be problematic because if the mortgage payment is not made, creditors can attempt to collect from either party.
Is a quitclaim deed a good option for removing one spouse from title?
If one spouse wants to be removed from title, then a quitclaim deed can be utilized. However, if both spouses are on the mortgage, a quitclaim deed does not remove that spouse from the mortgage and the bank can still attempt to collect from both spouses.
Is the custodial parent always awarded the house?
When deciding what happens with the family home, a court will always consider the best interests of the children. However, there is not a presumption that the spouse with physical custody of the children retains the house. The most practical decision is to give the home to the custodial parent, but the financial implications will be considered to be sure that the mortgage can be paid and that the other spouse is treated equitably.
In certain financial circumstances, the best option is to sell the home. But, if that is not in the best interests of the children, the judge may determine—after looking at all factors–that a deferred sale is feasible. In that case, the custodial parent and children may remain in the home for a period of time and defer the sale until a future date.
What if neither spouse can afford the mortgage payments after divorce?
If the couple cannot afford to maintain the mortgage following the divorce, then the home may have to be sold. Hopefully, the home is worth more than what is owed on the mortgage. If yes, then the couple can split the proceeds and each spouse proceed with obtaining replacement housing. If not, then the couple has a difficult decision to make.
If the couple can afford to make-up the difference in what is owed on the mortgage, then they can sell the home, pay-off the mortgage balance and move on with alternative housing. However, if they cannot afford to make-up the difference, then they will need to consider a short sale, or postponing the sale for a particular period of time. Postponing the sale can be problematic if the couple cannot agree on who should make the mortgage payments or if the payments are not made.
Are there tax consequences with one spouse paying the mortgage?
Yes, there may be an issue with who may claim the mortgage interest tax deduction if one spouse takes over the mortgage, assumes the mortgage, or purchases the other spouse’s equity in the home.
What happens with the house after separation but before the divorce is finalized?
The period of time between the couple’s decision to separate and the final divorce order can cause complications with many financial aspects of a divorce, including the house and the mortgage payments. Because this period of time can last several years, one spouse may want to sell the home while the other wants to keep it. During this time, the court will freeze any such activity relative to the home, meaning neither spouse can sell or refinance without the other spouse’s and court approval.
It is important to note that just because one spouse is staying in the home during this period, it does not necessarily mean the court will award the home to that spouse.