A marital residence is often the largest marital asset, whether it is a house, condo or a co-op. Pursuant to the NY Domestic Relations Law, marital residence obtained during the marriage is subject to “equitable distribution” at divorce. Equitable distribution means that assets such as marital home should be divided fairly between the spouses. However, fair does not necessarily mean equal. In reality, fair could mean that one spouse receives a greater share of the proceeds than the other.
However, if you and your spouse can reach a settlement without an intervention by court, you can each negotiate the best deal for yourself. If you are unable to negotiate a settlement with your spouse, a judge will impose a decision and order for division of the home upon you and your spouse. Such decisions are rarely pleasing to either party. A negotiated settlement, although not always perfect, is often more satisfactory than a decision by a judge.
There are various options for dividing the marital home. The most common scenarios for dealing with a family home at divorce are:
- Sale of the marital home and division of the proceeds between the spouses
- Sale of your share of the house to the other spouse
- Purchase of the other spouse’s share and either retaining or selling the house in the future
- Continued co-ownership with the other spouse and purchase of the other spouse’s interest in the future or sale of your interest to the other spouse or a third party.
If you want to sell the house together with your spouse and split the proceeds, be sure to know not only the equity value of the house but also the cost of selling the house. The equity value of the house is a current fair market value of the house minus any debts connected to the house, such as first mortgage, second mortgage, home equity loan, property tax liens, child support liens, judgment liens, etc. The fair market value of your house is the price the house would sell for on the open market right now. The cost of selling the house include closing costs (escrow fees, abstract and recording costs, appraisal fees, surveys, title insurance, transfer and stamp taxes, loan charges), agent’s commission, attorney’s fees, fix-up costs (preparation of the house to sell). One advantage of this option is that you will share the cost of sale and the tax liability with your spouse, and you might be able to take advantage of the IRS provision which allows exclusion of up to $250,000.00 of gain on the sale of the house, if you qualify. One disadvantage is that the money you receive from selling the house might not be enough for a purchase of a new one. Further, if you and your spouse are behind on the mortgage payments, your house may be foreclosed and you may incur a deficiency judgment as opposed to a profit from a sale. Deficiency represents the difference between the amount of loan and the mortgage outstanding.
If you want to sell your share of the house to your spouse you must determine whether your spouse is making a good offer for your share. Thus, you must know the true financial value of the house. One advantage of this option is that you do not have to pay taxes on the money you receive because the IRS does not tax money received as a property divisions during a divorce. However, keep in mind that whatever money you might receive for your share of the house might not be enough for purchase of a new home.
If you are looking to buy out your spouse’s share and either keep it or sell in the future, you must consider as many factors as possible including the other options listed above. Think about whether you can afford the monthly cost of owning a house, which will include mortgage, property taxes, maintenance, insurance, utilities, etc. Keep in mind that, that under the current tax law, you can deduct your mortgage interest payment and the property taxes you pay, so your net (actual) cost of owning a home might be lower than all of the expenses combined. Also consider how much you would make if you were to sell the house. If you are not planning to sell the house in near future, then you don’t have to worry about the sale cost or income taxes. Also consider how much you would receive if you and your spouse sold the property now and divided the proceeds. Of course, if you have children of the marriage who will reside with you, this option might benefit the children and allow stability in your life.
If you want to continue owning the house jointly with your spouse and either buy it in the future from your spouse or sell it in the future to your spouse or a third party, reconsider the other tree options again. This option is usually only utilized because a custodial parent is staying with the children in the house or because the housing market is so weak that the parties do not want to sell the house yet. There are no tax consequences until the house is ultimately sold because there is no division at divorce. However, when the house is sold, the spouse in possession must recognize gain and incur taxes from the sale unless the IRS $250,000.00 capital gains exclusion was preserved in the divorce and is still applicable. This option is certainly the most uncertain as to a continued sharing of responsibilities for home expenses and maintenance. It is always prudent to have a comprehensive written agreement outlining each spouse’s continue obligations.
Remember, in order to make an informed decision, you should always consider both the legal and financial realities. Consult with a lawyer or a financial advisor before making a decision.