LEGAL GUIDE
Written by attorney David Magnuson | Jun 2, 2010

Divorce and the Family Home

A home means different things to different people, but to many it symbolizes a refuge from the demands of life, a connection to the community, and the anchor of the family unit. Contemplating losing the home due to divorce is never pleasant. Depending on the particulars of your financial situation, selling the home may not be necessary. When deciding how to deal with your home during divorce, consider the following four options:

  1. Buy out your spouse by purchasing his or her share of the home
  2. Sell your share of the home to your spouse
  3. Sell the house to a third party and divide the community portion of the proceeds
  4. Continue to own the home together, with the agreement that you will sell it to your spouse or a third party in the future

This legal guide deals with the first option: buying out your spouse. If you have children, this is often the most appealing option. Remember, though, that after you buy out your spouse’s share of the property, your capital gains exclusion drops to $250,000. For many individuals, this simply isn’t an issue – the home hasn’t appreciated enough. For others, it’s a worthy consideration. Tens of thousands of dollars in taxes can be saved by selling the residence while it is co-owned by both spouses.

If you do decide to buy out your spouse’s share of the home, you may wonder how in the world you can afford it. After all, the family residence is the most significant asset for a majority of couples in California. If simply giving up other community property assets (such as stocks and bonds or an interest in a retirement plan) is enough to offset your spouse’s interest in the house, doing so may be a simple solution. An equally appealing option presents itself to those who are fortunate enough to own a significant amount of separate property. If you fall into this category, consider simply buying out your spouse by transferring separate property to him or her.

For many divorcing individuals who wish to buy out their spouse’s share of the family home, something more creative is required. Although there are many possible approaches, here are a few of the more common tactics you might consider:

  • Refinance the house or take out a second mortgage and pay the proceeds to your spouse. Depending on market conditions and the amount of equity you have built up in your home, simply refinancing your mortgage might generate enough cash to allow you to buy out your spouse’s interest. If not, a second mortgage on the home might do the trick. Interest payments made on the second mortgage are usually tax deductible.

  • Use an installment loan. If you plan on remaining in the home, ask your spouse if he or she would be willing to accept a secured installment note specifying payments over a fixed period of time in exchange for surrendering his or her interest in the home. Securing the note with the home affords your spouse some protection in the event that you default on the note. Furthermore, the interest you pay on the note may be deductible in the same way that mortgage interest is tax deductible.

  • Surrender your right to alimony payments. If it’s likely that a judge would require your spouse to pay you a significant amount of alimony, offer to give up your right to receive some (if not all) of these payments in exchange for your spouse’s share of the home.

  • Enter into an equity share financing arrangement. You may also want to consider asking your spouse to sell his or her share of the home to a third party -- typically a relative or friend of yours. If this approach seems appealing, you may want to engage the help of a financial professional to make sure you comply with IRS rules and enjoy all available tax benefits. You will also want to ensure that you draft an agreement that clearly spells out your rights and the third party’s rights. In most cases you would be required to pay rent to your new co-owner, simply because only you would have current enjoyment of the residence.

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