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Submit Close Considering Divorce? We've helped 85 clients find attorneys today.One of the most emotionally charged issues when dividing assets in a divorce is figuring out what will happen to the family home. The outcome typically involves the spouses:
When the spouses can't decide what will happen to the house, the court will. Most of the time, a judge won't order a couple to continue co-owning the house after the divorce unless both spouses agree to the arrangement. Rather, the court will order the house to be sold and divide the proceeds according to the state's property division laws.
In many divorces, though, the exes are able to cooperate and even benefit from continued co-ownership of the family home. Here's what you need to know if co-owning a house after divorce seems like a possibility in your situation.
When you're making decisions about whether to own property jointly after divorce, you'll have to consider not only emotional factors, but financial ones, as well—the family home is often the largest asset spouses own together. Couples often find that co-owning a house after a divorce is a good idea in the following situations.
Stability for children during and after the divorce is key. Many divorcing parents want to do everything they can to make sure that the divorce doesn't disrupt their children's lives. Co-owning the family house after divorce ensures that the kids won't have to move, and can help ease the stress associated with the divorce and their parents' new living arrangements.
Unless you need to cash out your interest in the house immediately, it might make sense to hold onto the house if you live in a buyer's market. Perhaps interest rates are high, there's a lot of other homes in your neighborhood for sale, or you just think waiting a bit will get you more money when you sell. All of these factors might be a good reason to hold onto the house until the market shifts so that both of you can maximize your profits when you eventually sell.
If, after consulting with a real estate professional and gauging the market in your area, you discover you and your spouse owe more on your mortgage than you could sell the home for, it means your mortgage is "underwater." Instead of selling, you and your spouse could hold the property, and maybe even rent it out to help cover your mortgage payments. You can use the hold time to make additional payments on the mortgage, or hope that the market takes an upswing and you can sell for more than you owe.
To complete a buyout, one of you will have to either have enough property or cash on hand to buy the other's interest, or be able to qualify for a mortgage modification or refinance. Even when you both agree that one of you will buyout the other's interest in the house, it simply might not be financially possible at the time of the divorce. Continuing to co-own the house gives the purchasing spouse more time to save up.
If both you and your spouse have enough resources to be able to move out after the divorce, you could consider keeping the family home as a rental property. You could reach an agreement on how to share proceeds, and hire a property manager so neither of you has to be involved in day-to-day decisions and management.
Keep in mind that co-owing doesn't have to be forever—spouses can agree to hold onto the house until a specified event occurs, such as your youngest child's graduation from high school. (This is called a "deferred sale.") If you reach an agreement like this with your spouse, make sure to get it in writing and incorporate it into your divorce decree.
When you decide to co-own your house with your ex, it means that you'll both continue to be on the deed and responsible for paying the mortgage (if any). The arrangement requires a level of coordination that isn't worth it unless the pros outweigh the cons.
Consider these potential benefits of post-divorce co-ownership:
Post-divorce co-ownership of the family home has its cons, too. The arrangement can be risky for several reasons.
Both exes' credit reports will show the entire amount of the mortgage. Having such a large debt on your record can make it difficult to get credit for other purposes. If your ex fails to pay the mortgage (or pays it late), your credit rating will take a hit.
You must decide how you will share the mortgage and upkeep expenses, and who can take the mortgage interest tax deduction. For example, even if you pay equal amounts toward the monthly mortgage, you can agree that one ex-spouse gets to take the entire mortgage interest deduction, in exchange for increased support or some other equalizing payment.
If you own the house together for a significant period of time after your divorce becomes final—rather than having one spouse buy out the other as part of the divorce—you risk losing an important tax benefit: the rule that says transfers between former spouses aren't taxable if they're a result of a divorce. That rule, in IRS Section 1041, applies as long as the transfer:
However, even if the transfer takes place more than six years after your divorce, you may still qualify for the tax benefit if you can prove that the transfer was part of the property division in your divorce, and you and your spouse owned the house when your marriage ended. (See IRS Pub. 504.)
So make sure your agreement to keep the house is part of your written settlement agreement, and submit it to the court so that a judge can approve it and make it part of an official court order. That way, if one of you will keep the house after the co-ownership period is over, you may still qualify for the tax treatment of transfers between former spouses.
Also, even if you plan to sell the house, you may meet the residency requirements for the partial exclusion on capital gains taxes if you can show that one of you was allowed to continue living in the home under your divorce agreement. (See IRS Pub. 523.)
If you anticipate that co-ownership will make the emotional disentanglement of divorce more difficult, think twice before you agree to this long-term commitment.
If you're parents, however, you'll still have to interact with one another about your children. So adding co-ownership of the home to the mix might not be much of an additional burden.
The spouse who isn't living in the house might have a change of heart and want (or need) to sell sooner than anticipated. Your settlement agreement should set a specific time that the house can be sold. Most of the time, that will control what happens.
But anyone who's determined to get out of an agreement can make your life miserable and force you into a court fight—for example, by claiming they signed the agreement under duress. So if you think your co-ownership agreement might not stick, don't make it in the first place.
Another risk is that if your ex is sued by creditors or files for bankruptcy, their share of the house could be seized, possibly resulting in a forced sale. There's really no way to protect against this. So if you believe it's a possibility, don't go the co-ownership route.
Think about your estate plan, and consider what would happen to the home if one of you died while you were still co-owners. Each of you has the right to decide who gets your share of the house at death. If you've agreed that one of you will stay in the house until the kids are a certain age, you could also agree that during that period you'll each leave your share of the house to the other. That would ensure that in the event of one of your deaths, the other spouse can stay in the house with the kids as planned. This requires that you both make wills immediately.
Pros of Co-Owning a House After Divorce
Cons of Co-Owning a House After Divorce
· Makes it possible for the kids to stay in house after divorce
· Keeps both exes on the hook for the mortgage
· Delays or avoids having to go through the stressful process of moving everyone out and selling the home at the same time as the divorce
· Requires close accounting to avoid financial or tax-related disadvantages
· Allows both exes to capitalize on any appreciation that occurs after the divorce
· Involves interaction with your ex
· Potentially provides an alternative source of income if the property is kept as a rental
· Subjects you to the whims and needs of your ex
· Avoids selling the property at a loss
· Requires additional estate planning
If, after weighing the pros and cons, you decide that it's best not to co-own the family home after divorce, you and your ex have other options. The "clean and dirty" option is to sell the house and split the proceeds (or costs) equitably. The other common option is to arrange for one spouse to buy out the other's interest in the house. To protect your interests in either of these options, it's a good idea to hire an appraiser to tell you what the market value of the home is.
Deciding what to do with the family home after divorce is a big decision for any divorcing couple. And, because the transaction can involve a lot of money—both equity and debt—as well as emotional considerations, it's important to evaluate all your options. Find the right professionals to help you with your decision. For example, a good real estate agent can help you get a feel for the market, an accountant can help you with divorce-related tax issues, and a family law attorney can help you structure your plans with written, binding, and enforceable agreements.