When a marriage ends one of the biggest issues facing the ex-spouses is what to do with the marital home after the divorce. If they own that home, it’s not as simple as ‘sell it and split everything down the middle.’ Here are some things divorcing couples need to consider.
- California law stipulates that everything financial during the marriage (with a very few exceptions that don’t apply here) is community property. Even if one spouse entered the marriage with the home they are living in, if during the marriage mortgage payments were made, or property taxes were paid, or home improvements were made, the marital community (both spouses) is entitled to part of the increase in the value of the property.
- California law also states that from the date of separation until the date the divorce is final (which can be a long time) the spouse who lives in the home may have to pay the other spouse one half the fair rental value of the marital home. The theory here is that if the home were empty the community could rent out the house during the divorce and split the rental profits. This is an important thing to consider when deciding where to live after the separation.
- Another important factor to remember is that each spouse is equally responsible for all bills incurred during the marriage—including the mortgage, property taxes, and standard upkeep on the home. So from the point of separation until the divorce is final, if one spouse is paying all these expenses, the other spouse can be forced to pay half.
- If the former spouses decide to sell the marital home and there is enough money remaining after paying off the mortgage, then the fair rental value and mortgage payment equalization can be done when the parties divvy up the money from the house sale. If there isn’t enough equity (today there is almost always enough equity because of California’s hot housing market), then both spouses must remember that they might owe (or be credited for) those payments when you split the properties.
- Another way for the parties to handle a home they own is for one spouse to buy out the other party’s interest in the home and continue to own that home after the divorce. This usually involves refinancing if both spouses are on the mortgage to the home. But be careful! Since the house is not being sold, the market will not determine the value of the home. So who determines the fair value of the home?
- Obviously, the ideal situation would be for the spouses to assign a fair value to the home and agree on it. If they cannot agree than there are two other options. The spouses could accept the appraised value the bank will use in making a refinance; however, that is often low. They could also agree to jointly pay to have an appraisal done. Regardless of the choice, the value assigned to the home will be the biggest factor in figuring out how much one spouse will pay to the other to keep the home.
- If the spouses are renting the home, neither the fair rental value nor the mortgage matter. Since both spousal names are on the lease, the property owner doesn’t usually care that the parties are divorcing because they can go after both spouses if the rent isn’t paid.
Divorce is stressful and the more assets a couple owns, the more tedious and potentially contentious negotiations will be. Deciding what will happen to the marital home after the divorce is often the most difficult of the financial decisions to be made. Both spouses would be wise to examine their options before signing any agreement.