Emotions and divorce are never a good combination. It requires a logical and trained mind to split the property fairly and as agreed. There are several different legal ways that a property might have to be split. There might be a prenuptial agreement, or you might be in a community property state or an equitable distribution state. These are circumstances that will affect how real estate is divided in your situation.

When real estate is involved, it is usually the most valuable asset that needs to be divided. Even if you consider yourself well-informed on real estate law, because of the emotions, you’d be wise to seek out the assistance of a divorce lawyer and/or financial advisor. But you still need to understand your options so that it is all done fairly and equitably.

There are three main ways property is divided in a divorce:

• Both spouses sell it and split the equity.
• One spouse buys out the other.
• Both spouses agree to defer a sale until a later date.

Those can apply to almost any real estate, but more rules apply depending on if the property is a family residence or an investment property.

The Family Home

Selling the family home and splitting the equity is pretty straightforward. If the sale is completed before the divorce becomes final, the equity will be split 50-50 or as agreed to at closing. If the sale will occur after the divorce is final, you may need to have the house appraised and agree to the equity percentage split. There can be other considerations that need to be worked out such as the cost of improvements before a sale. Or if one spouse remains in the house until it sells — the value of having a place to live.

There are also times when one spouse wants to take sole ownership of the family home. In this case, there are other things to consider and things that need to be taken care of. First of all, the spouse staying in the house needs to be able to afford the mortgage payments. In many cases, they also need to be able to buy out the spouse that is leaving. The buyout can often be accomplished by giving up other marital assets such as a portion of a 401k retirement account, a boat, a motorhome, or another asset of value. Any way that the buyout happens usually requires that the house be appraised to establish the current value.

Besides the buyout, the spouse remaining in the house will need to have the title changed to remove the name of the divorced spouse. That way, the remaining spouse can sell the house at any time without needing a second signature. The spouse leaving the house should also want their name removed from the mortgage for liability reasons. That means the remaining spouse needs to refinance the house, which could be an obstacle if the original mortgage is heavily dependent on the income of the spouse that is leaving.

If the sale is deferred, the divorce paperwork needs to specify the portion of ownership that each spouse still owns. There could be other issues involved such as a future date that the house has to be sold, maintenance costs, and how the property will be managed if it is turned into a rental.

Investment Property

An investment property can offer a fourth alternative rather than selling, a buyout, or deferring a sale. Another option is one spouse may want to take up residence in an investment property while the other continues living in the family home. This person may even choose to relinquish all interest in the family home in exchange for ownership of the investment property. 

When an investment property becomes a primary residence, there is a tax implication you need to be aware of. What comes into play is tax law about prorated capital gains exclusion for periods of non-primary use. Under the Housing Assistance Tax Act of 2008, the IRS wants its share of the capital gains tax during the period from January 1, 2009, up until the property becomes a primary residence. This is tax owed by the spouse taking up residence in the rental property. An owed tax is vastly different from the $250,000 per person capital gain exclusion that applies to the family home. There are formulas to figure this out, but you may want to consult with a tax advisor. The key variables involved:

• How long you have owned the home?
• How much of a profit do you realize from the sale?
• What you paid for the home.
• Capital investments you made in the home.
• Final sale price.
• Filing status and income.
• The applicable gains tax rate.

Another variation that applies to an investment house is that in most states the house will remain fully owned by the original buyer if it was purchased before the marriage (even without a prenuptial agreement). What the court is likely to look at is if the property remained an exclusive benefit of the owning spouse. If that spouse begins sharing the use and enjoyment of the property (or property income, such as depositing rent in a joint bank account), the solitary ownership interest may dissolve. 

The situations discussed here are generalities. Every marriage and divorce have different assets and logic about how to divide them. The place to start is by understanding what is legal and right in your circumstances.

Please comment with your perceptions, experiences, thoughts, and insights.