For many people, their most valuable asset is going to be the family home. The most common way of dealing with the family home is to sell it and divide the net sale proceeds. You and your spouse will need to agree on numerous issues including the following:
If you and your spouse are able to do so, it will certainly save money if both you and your spouse can continue to live in the home until the home is sold. If you can do this, you can continue to pool your earnings and continue to pay your bills, as you did during the marriage. After the home is sold, you can establish separate residences and support payments, if any, can start at that time.
Sometimes, one spouse wants to keep the family home. That spouse will need to buyout the other spouse’s ownership interest in the home. The first step is to agree on a buyout amount. You will start by trying to agree on the fair market value of the home. You can determine the fair market value in any number of ways. One way is to hire an appraiser, but that will cost you around $600. Another way is to contact two or three realtors in your area and ask them to provide a free “market analysis”. Most realtors will gladly provide a free market analysis because they hope that they will get the listing if the property ends up being sold. You should both be present when the appraiser or the realtors inspect the property. If you get multiple values, you can average them. After you have agreed on the value of the home, subtract the mortgage balance to arrive at the equity.
If the home is entirely community property, and neither party has any reimbursement rights, then the typical buyout price will be equal to one half of the equity. Generally, there is no discount for a hypothetical real estate commission. In other words, the spouse wanting to buyout the other party’s interest may want to discount the value of the home by 5% or 6% because a real estate commission would be paid if the house were actually sold. However, the house is not being sold. No commission is being paid. So, the buyout price is not normally discounted due to a non-existent commission. However, this issue, like all issues, is negotiable as part of the settlement package.
One or both spouses may have a right of reimbursement when it comes to the family home. If you used your separate property funds to purchase or improve the family home, then you are entitled to be reimbursed for your separate property contribution. For example, assume when you and your spouse purchased the home, you paid $50,000 for the down payment and the $50,000 was your separate money because you earned it before marriage. When the house is sold, you should be reimbursed with the first $50,000 of the net sale proceeds and the balance should be split equally by the community. You are not entitled to collect interest on your $50,000. Another example, assume you and your spouse purchased the family home, using community funds. During the marriage, your spouse inherited $50,000 and all of that money was used to put in a new swimming pool. The inherited money was your spouse’s separate property. Your spouse would have a right to be reimbursed from the sale proceeds for the $50,000 because it was used to improve the home.
If there is going to be a buyout, the spouse keeping the family home should refinance all loans that are connected to the home. If you have a mortgage, the mortgage should be refinanced, with a new loan issued in the name of the party that is going to keep the home. If you have a home equity line of credit, that also should be refinanced with a new loan in the name of party that is going to keep the home. The old loans, which are held in both parties’ names, should be paid off and replaced with loans that are held in the name of the spouse that is keeping the property.
If you sell your one half ownership interest in the family home to your spouse and the mortgage is not refinanced, then your name will still be on the old mortgage. It does not matter if you sign a deed removing your name from the title to the home, your name will still be on the loan. This can create at least two problems for you. First, if your ex-spouse fails to pay the monthly mortgage payments in a timely manner, your credit will be impaired. Second, if your name is on the old mortgage, you will have to disclose that loan obligation when you go to buy a new home for yourself and apply for a mortgage. Having your name on the old mortgage will make it more difficult for you to obtain a new mortgage when you go to buy a new home for yourself. If your spouse can’t qualify to refinance the old mortgage, that may make it impossible for your spouse to buy out your interest unless you are willing to run the risk that your credit may be impaired and/or that it will be more difficult for you to obtain a mortgage in the future because your name is still on the old mortgage.
Even if the spouse that wants to keep the family home is able to qualify to refinance the old mortgage into his or her sole name, where does the money come from to buy out the other spouse’s one half ownership interest? If you have enough equity in the home, when the buying spouse goes to refinance, he or she may be able to obtain a loan that is large enough to pay off the old loan and also allow for cash to be taken out. The cash can be used to pay the buyout price. Another option is to use other assets to accomplish the buyout. For example, one spouse keeps the family home and the other spouse keeps the bulk of the retirement assets or other assets. If you are going to use retirement assets to accomplish the buyout, remember, the equity in the family home oftentimes consists of after-tax dollars (i.e., if the home were sold, oftentimes no income taxes are due on the proceeds). Retirement account funds are almost always pre-tax dollars. $100,000 of pre-tax dollars contained in a traditional IRA account or 401(k) account is worth a lot less than $100,000 of equity in the family home.
There are advantages to having one spouse keep the family home. First, the home may have a low property tax basis, particularly if the home was purchased many years ago. If you sell the family home, that low property tax basis will be lost (although the property tax basis can sometimes be transferred by one spouse to a new home if you are over 55 and meet various additional qualifications). Second, if you sell the home, you will lose some significant amount of equity to real estate commissions. If you are selling a $1,000,000 house with a 5% real estate commission, $50,000 of equity will disappear because it will be paid to the realtors and half of that $50,000 is your share of the equity. If your spouse is willing to buy out your interest in the home without discounting the equity due to a hypothetical real estate commission, then that puts more money in your pocket as opposed to selling the home to a third party. Third, if you have children, then you should think about how selling the home will impact the children. You may not want to displace the children. If the family home is sold, you and your spouse may not be able to afford to purchase a new home in the same school district. If you sell the family home, your spouse may relocate far away with the children. There are a lot of factors that need to be taken into consideration when deciding whether to sell the family home or for one spouse to buy out the other spouse’s interest in the home.
If one spouse is going to buyout the other spouse’s ownership interest in the family home, then an Interspousal Transfer Deed will need to be signed and recorded with the county recorder’s office. An Interspousal Transfer Deed is not a Judicial Council form. You can find fillable pdf examples of Interspousal Transfer Deeds on the internet. A Quitclaim Deed or a Grant Deed will also work, but the Interspousal Transfer Deed is better because it contains language letting the County Recorder know that the transfer is being made pursuant to a divorce settlement and is not subject to a documentary transfer tax and that the property should not be reappraised for property tax purposes. Whichever deed you use, the signatures on the deed will need to be notarized. When you record the deed with the County Recorder, the spouse keeping the home will need to fill out a “Preliminary Change of Ownership” form. Again, this is not a Judicial Council form, but a form you can obtain online from your local County Recorder’s Office.
Very complex legal issues can arise when the family home was purchased by one spouse before marriage or when title to the family home was changed during the marriage. These complex issues are beyond the scope of this website. You should schedule a consultation with an experienced divorce attorney to find out your rights in either of these situations.