Welcome to FreeDivorce.com.
Christina: This is Christina.
Ed: This is Ed. Today, are going to talk about issues related to the division of the family home. For many people, their most valuable asset is going to be the family home.
Ed: Christina, what is the most common way of dealing with the family home?
Christina: The most common way divorcing couples deal with the family home is to sell it and divide the net sale proceeds.
Ed: If you and your spouse are going to agree to sell the family home, what are some of the items you are going to have to agree upon?
Christina: You and your spouse will need to agree on numerous issues including the following: 1) Which realtor will you use to sell the home? 2) At what price will the home be listed for sale? 3) When will the home be listed for sale? 4) What improvements will be made to the home before it is listed for sale? 5) Who will live in the house until it is sold? and 6) Who will pay the expenses associated with the house until it is sold?
Ed: Who lives in the home until it is sold?
Christina: 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 then establish separate residences. Support payments, if any, can start at that time.
Ed: What if one spouse wants to keep the family home. What do you need to discuss and agree upon?
Christina: If one spouse wants to keep the family home, that spouse will need to buy out 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.
Ed: How do couples typically reach an agreement on the fair market value of the home?
Christina: 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 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 appraisals, you can average them. After you have agreed on the value of the home, subtract the mortgage balance to arrive at the equity.
Ed: After you agree on the fair market value for the home, how do you decide the amount of the buyout price?
Christina: 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. So, if the house is worth $500,000 and you owe $300,000, there is $200,000 of equity. The buyout price will be half of $200,000 or $100,000 to be paid to the other spouse.
Ed: What about discounting the buyout price for real estate commissions? If the home were sold for $500,000, about $25,000 would go for real estate commissions. Shouldn’t the buyout price be discounted because, if the house were sold, the parties would not net $200,000? They would net only about $175,000 because of the real estate commission. Shouldn’t the buyout price behalf of $175,000?
Christina: Generally, there is no discount for a hypothetical real estate commission. In other words, the spouse wanting to buy out the other party’s interest may want to discount the value of the home by 5% 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.
Ed: What if one party used their separate property for the down payment or to improve the house, what do you do in that case?
Christina: 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.
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.
Ed: If you used $50,000 of your separate property funds for the down payment, do you get interested in that $50,000, or do you get part of the appreciation?
Christina: You are not entitled to collect interest on your $50,000. Nor are you entitled to part of the appreciation. If you took title to the house in both names, the house is community property and your reimbursement claim is limited to getting a credit for the separate property funds you put into the property.
Ed: If my spouse is going to buy out my interest in the family home, what happens to the existing mortgage? That mortgage obligation is in both our names?
Christina: 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.
Ed: What would happen if I agree to sell my one-half interest in the family home to my spouse, but she does not refinance the mortgage, but instead just keeps the original mortgage in place?
Christina: 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.
Ed: What if my spouse can’t qualify for a new mortgage in her sole name?
Christina: 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.
Ed: What if my spouse can qualify to refinance the house and get a new loan in just her name, where does the money come from to pay me for my one-half interest?
Christina: 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. That 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.
Ed: Is it a good idea for one spouse to take retirement assets as an offset to the other spouse keeping the family home?
Christina: 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. If the home were sold, oftentimes no income taxes will be due on the proceeds because a $500,000 capital gain exemption will frequently apply for married couples. 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.
Ed: Are there advantages to one spouse keeping the family home?
Christina: There can be substantial 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.
Ed: If I agree to sell my half interest in the family home, don’t I need to sign some sort of deed?
Christina: Yes. If one spouse is going to buy out 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.
Ed: Can I find an Interspousal Transfer Deed in the Court Forms database?
Christina: No. An Interspousal Transfer Deed is not a Judicial Council form. However, 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.
Ed: Will my signature on the deed to need to be notarized?
Christina: Yes. Whichever type of deed you use, the signatures on the deed will need to be notarized. Just “Google” Notaries near me. A notary will charge $15 per signature.
Ed: After the deed is signed, does it have to be recorded with the County Recorder’s Office?
Christina: Yes. You will need to record the deed. The spouse keeping the house normally assumes the task of getting the deed recorded. Just take the deed to the Recorder’s office in the county where the home is located. The County Recorder will charge a small fee to record the deed, usually around $30. When you record the deed with the County Recorder, the spouse keeping the home will also need to fill out a “Preliminary Change of Ownership” form. Again, this is not a Judicial Council form but is a form you can obtain online from your local County Recorder’s Office.
Ed: What if one spouse purchased the family home before marriage or what if the home was purchased during the marriage in one party’s name or if the title was changed during the marriage?
Christina: Very complex legal issues can arise when the family home was purchased by one spouse before marriage or when the title to the family home was taken in just one party’s name or title 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 any of these situations.