Dividing Home Equity in Divorce
UPDATED: August 20, 2012
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Either because of economic constraints or emotional ties to a house, many divorcing couples no longer want the home they purchased during their marriage. In such a case, the divorce process will have to divide the equity the parties have built in the home.
Calculating Home Equity
To divide home equity in a divorce, the first step is to calculate the equity by getting the currently appraised value of the house by a qualified residential real estate appraiser, and subtracting the mortgage and any other liens on it. Be sure that the appraisal considers any additions or enhancements made to the home or property that will increase the value of the home. Before dividing home equity, the divorcing parties need to get an appraisal that evaluates the proper value of the home at the time of the divorce. After the sale of the house, the parties will need to figure out how the equity is split. How much each spouse gets will depend on the state law, and on the source of the money that was used to purchase the home.
Dividing the Equity
During the course of a marriage, anyproperty the couple acquires during the marriage is considered community property. Generally, if the house was purchased with community property funds during the marriage, the house would be considered community property because the source of the funds determines the character of the item. When the house is considered community property, each spouse would have a one half interest in the house and would have a one half interest in the equity. For example, if the equity is $100,000, each spouse would be entitled to $50,000 of the equity.
If one party receives the house as separate property, however, then there may be no division of the home equity. Property is only considered separate if it was acquired before the marriage, after the marriage, or as part of an inheritance or gift to one spouse and not the other. It is highly unlikely that a marital home acquired during the course of a marriage is separate property, so the two parties will likely split the equity of the home equally.
The spouses can agree to an unequal division of community property; a spouse can receive more than half the community property pursuant to an agreement with the other spouse. The agreement should be in writing to avoid future potential legal disputes. Any agreement for an unequal division of property can be overturned by a judge if the division is not fair and equitable for both parties.
When One Party Wants the House
If one party is interested in buying the home from the other party, the two will need to negotiate the appropriate sale price. The two sides would have to negotiate a fair split of commissions, taxes during the divorce, and other costs associated with the sale.
In addition, the buyer of the home would most likely wish to buy out the other party with a lower appraisal, while the seller would clearly prefer a higher appraisal. Since appraisals are just estimates of the value of the home, selecting an appraisal or an appraisal value may be the most difficult part of the process. One way to eliminate this problem is to select two appraisers, and then pick a number mid-way between the appraisal provided by each appraiser. This way, neither party is affected by an overly high or low appraisal value. Some parties may choose to select three appraisers, and take the median appraisal value.
Getting Legal Help
As with any issue associated with a divorce, both parties should consult and hire an experienced family law attorney familiar with the laws of the state. Dividing home equity is a critical process for both parties, and it should not be done so without legal representation.