Frequently Asked Questions: Keeping the Marital Home in Divorce

There are generally two options for handling the marital home: (1) sell the home and divide the proceeds; or (2) have one spouse buy out the other spouse's interest. Each option has distinct financial, tax, and practical implications that should be carefully considered.

No. Even if one spouse transfers their interest in the home to the other spouse via quitclaim deed so that only one name is on the title, the transferring spouse's name remains on the mortgage and both spouses remain liable in the event of nonpayment. The only ways to remove an ex-spouse's name from the mortgage are for the retaining spouse to assume the loan, refinance it in their own name, or pay it off.

Under 26 U.S.C. § 1041, no gain or loss is recognized on a transfer of property from an individual to a spouse or former spouse if the transfer is incident to the divorce. A transfer is "incident to the divorce" if it occurs within one year after the date the marriage ceases, or if it is related to the cessation of the marriage. The property is treated as acquired by the transferee by gift, and the transferee's basis in the property is the adjusted basis of the transferor. This means the transferring spouse will not pay capital gains tax on the transfer itself, but the receiving spouse will inherit the transferor's cost basis in the property.

Under 26 U.S.C. § 121, single taxpayers can exclude from income up to $250,000 of gain from the sale of their principal residence. Taxpayers who are married and filing joint returns can exclude up to $500,000 of gain. To qualify for the exclusion, an individual must generally own and use the property as their principal residence for at least two of the five years prior to the sale. A taxpayer can generally only exclude gain from one sale every two years, though exceptions exist for changes in employment, health issues, or unforeseen circumstances.

There are cases when a non-working or lower-earning spouse should keep the residence even when doing so creates an unequal settlement. For example, if the house payment is significantly lower than rental costs in the area and the resident spouse has custody of children, allowing him or her to keep the home with or without paying the other spouse's equity share may prevent financial hardship. However, the decision depends on whether the spouse can afford the ongoing mortgage payments, maintenance, insurance, and other costs of homeownership on his or her income and any support payments he or she receives.

Writer’s legal practice experience: Many people are emotionally tied to the home and would like to keep it, however may not be thinking realistically about the future costs without the benefit of the other party’s income to assist in payment.

If parties are dividing the home proceeds more than a year in the future, it is generally better to specify a percentage of the proceeds rather than a fixed dollar amount. Property values can increase or decrease significantly over time. Agreeing on a percentage ensures that both spouses share proportionally in any appreciation or depreciation. It is good to divide the proceeds equally as that is a fair division regardless of what the home equity ultimately ends up being.

Writer’s legal practice experience: Once the parties are divorced or legally separated, if co-owning the home and remaining there together until the home is sold, they can enter into a cohabitation agreement which will cover the terms or residing together as cohabitants.

Property acquired as a result of a property settlement agreement with the debtor's spouse, or of divorce decree, is included in the bankruptcy estate if it is acquired within 180 days after the bankruptcy petition is filed. Under 11 U.S.C. § 541(a)(5)(B), such property becomes property of the estate even though the debtor's interest arose after the commencement of the case.

Continuing to co-own the property jointly creates an ongoing financial and legal tie between ex-spouses that may create problems, particularly in adversarial relationships. It may also land the parties back in court. Risks include disagreements over maintenance and repairs, one party failing to make agreed-upon payments, difficulty coordinating the eventual sale, and complications if one spouse wants to sell earlier than planned or if one spouse remarries or experiences financial difficulties. Additionally, both parties remain liable for the mortgage and any property-related liabilities during the co-ownership period.