Tips & AdviceHow to Divide Real Estate in a Divorce

How to Divide Real Estate in a Divorce

Getting divorced is rarely easy. Even when both parties consider the divorce to be amicable, there are still a lot of important—and sometimes complicated—questions that will need to be answered. This is especially likely to be true if there were significant assets involved in the marriage, such as real estate.

Unlike, say, a savings account, a house is not something that can usually be evenly divided. This means both parties will need to come to an agreement regarding who is allowed to claim certain assets.

Additionally, there might be a few other complications you’ll need to address, such as how divorce laws vary by state. By taking some time to develop a plan and getting help from an attorney or financial advisor when needed, you can find a way to distribute real estate assets in a way that is fair for both parties.

What is Considered Real Property in a Divorce?

In general, the goal of the divorce process is to distribute property in a way that is equitable (fair) for both parties. In some cases, this might mean the property is not equally distributed between the parties, especially if there were significant wealth differences throughout the marriage.

Generally, all assets that will be distributed can fall into one of two categories: real property and personal property. Real property, as is typically the case within the law, is a term used to refer to homes, land, and other immovable property types. Personal property, on the other hand, is much more “mobile” and can include bank accounts, cars, furniture, investments, life insurance, and more.

Understanding the differences between these types of property—and how they might affect your divorce—can help the entire process go more smoothly.

Strategies for Splitting the House in a Divorce

When determining who (if anyone) gets to keep the house in a divorce, there are quite a few things you will need to keep in mind. The first question you’ll need to answer is did you sign any prenuptial (prenup) agreements?

If you did, this could affect who is entitled to what. If one spouse already owned the house before the marriage and they also signed a prenuptial agreement protecting it, then they might be able to claim the house for themselves.

But only a small fraction of marriages involve any sort of prenuptial agreement. In most cases, the property will be legally shared by both parties. Typically, this means you’ll have three primary options to choose from:

Sell the House and Split the Proceeds

One of the challenges of “splitting” a home in a divorce is that real estate is notoriously illiquid and, therefore, difficult to divide. But by selling the home, you can “liquify” your assets and turn your equity into something (cash) that can be much more easily divided.

In most cases, the expenses that accrue when selling your home will be paid for with the proceeds of the sale. After that, the remaining equity can be distributed between both parties. But keep in mind that—depending on the circumstances of your marriage and the state you live in—that doesn’t necessarily mean the proceeds will be split evenly between the two parties.

One Party Buys Out the Other

If one person wants to continue living in (and owning) the original property, they might consider “buying out” the equity share of the other party. This ensures that both parties will get a claim to at least a portion of the accrued equity without having to actually sell the home.

Typically, a buyout will still require the couple to refinance the home. During the refinance, one person’s name will likely be removed from the mortgage. Because just one person will now be paying the mortgage, lenders will also need to verify income to ensure that payments can still be made. There are quite a few lenders that specifically work with people who were recently divorced, which might be worth considering in certain situations.

Defer Your Final Decision

Divorce is, even in the best scenarios, a stressful process. Selling a house can also be extremely stressful and you might end up finding yourself in a position where you can simply only handle one at a time. That’s okay. Contrary to what you might assume, not everything needs to be finalized right off the bat. If you need to defer your decision until later, you will have the option to do so.

In addition to simply needing more time, there are quite a few situations where you might want to defer the option until later. For example, if you currently want to stay in your kids’ school district, you might wait until the end of the year before moving. You might also be waiting until you’ve both found a new place to live. However, if you are going to defer the decision, be sure to understand that leaving prior to selling could potentially minimize the capital gains tax deductions that you are allowed to claim.

Be Sure to Check Your State’s Laws

While there are a few federal laws that might be relevant, in general, marriage laws are largely set and enforced at the state level. This means that the laws of both the state you got married in and the state you are currently living in could potentially affect how real estate is distributed in your divorce.

There are quite a few examples of legal variations between states. One example is the “community property law” that currently applies to eight states (AZ, CA, ID, NM, NV, TX, WA, WI). This law asserts that all assets and debts accrued over the course of the marriage apply equally to both parties.

There are plenty of other variations as well. In general, divorce law can be somewhat difficult to navigate, which is why—regardless of the state you live in—working with an attorney will usually be a good idea.