Calculating a House Buyout in Divorce
- What options are available for your house
- How buyouts of a home get calculated
- How to buy out a house
- Buying out the house when children are involved
- Is a home buyout taxable?
Are you and your ex are deciding how to split your home equity? You can use an online calculator to find out how much it would cost to buy out your ex. Be aware that there are many factors that will influence the final amount. Keep reading to learn about them.
What options are available for your house when going through divorce?
When divorcing, there are several paths you can take when it comes to your house. Here are the primary ones:
Sell the property
One of the easiest options for dealing with your home when you’re going through a divorce is to just sell the property and divide the proceeds from the sale with your ex.
In a situation like this, you and your ex would each get half of the profits, and each would have to find a new place to live. This is a good option if you have no children from the marriage or your children are adults whose lives will not be too significantly disrupted by the divorce. It's also an easy solution if you both equally contributed to the purchase of the home.
If, on the other hand, you are still making payments on the house, selling it would add to the balance that you and your ex must address. Selling the house while still making payments is not for everyone. If one spouse has no income or cannot find other housing, for example, the other spouse would have to pay off a greater degree of the debt than may be considered fair.
There are tax benefits to selling the home. To file a tax return jointly, a couple must still be married on December 31 of the year for which they are filing their taxes, excluding up to $500,000 of their profit from selling the house. If they were to file individually, their exclusion limit would be just $250,000. If the profits from the sale of the house are more than $500,000, the spouses could split the tax bill equally.
While there are benefits to selling your home, you should know that you and your spouse would also have to share in the selling cost. This expense could reduce how much you walk away with in the divorce.
Buy out your spouse
A second option is for one spouse to buy out the other's share of the home.
Let's say you have $100,000 of equity in the house. The spouse who continues to live there could give up their share of other joint assets, assume a greater share of the marital debt, or secure a cash-out refinance loan in order to "buy out" the other. This would give the departing spouse their rightful share of the equity.
There are benefits to buyouts like this. For example, a buyout can be good for families with young kids since, by keeping the home, a sense of familiarity is preserved for the children.
One spouse keeping the house also means that selling costs are kept low. However, this arrangement will not work if the spouse who stays in the home does not have enough income or a high enough credit score to get approved for cash-out refinancing.
Another potential issue: If the cash-out refinancing increases the total loan balance, it could create financial hardship for the spouse staying in the home. and, if that spouse eventually decides to sell the house, the selling costs are passed on to them directly. They won't share the selling costs with their former spouse because their former spouse is no longer in the picture.
Co-own the house
Another option is to co-own the house after the divorce. If the divorce is friendly, this may be feasible. This is known as a deferred sale of the home.
The route of a deferred sale is sometimes taken when spouses decide to wait for their youngest child to graduate from high school before selling the house.
A deferred sale is also an option if the current housing market is not good for selling.
Co-owning the house may seem like the easiest option when you have so many other big life changes on your plate. However, it requires both divorcing spouses to be on the same page regarding mortgage payments, repairs and maintenance, insurance, property taxes, and other related costs.
Another benefit of deferring the sale of the house is that the costs and appreciation of the house are shared by both spouses. This might put both parties in good a good position to sell the house when the time is right.
However, co-ownership means that each spouse will get no more than $250,000 of gains exempted from their income, which might affect one spouse disproportionately.
How does a home buyout get calculated in a divorce?
To calculate how much it would cost to buy your ex out of your shared home, you need to know the amount of equity you and your ex share in the home. Use this formula:
Net equity = (the appraised value - mortgage obligation)/2
- First, you must determine the appraised value.
- Once you have that figure, subtract the mortgage obligation from it. This is your total equity.
- Now it's time to calculate your net equity. Divide your total equity in half. This amount is each spouse's net equity.
Note: Even if your furniture is not being split equally, you can factor the value of that difference in at the end of the process.
Let's say you and your ex own a home appraised at $500,000. You have a mortgage for $200,000 on the house, meaning you have $300,000 in shared equity. Divide that number in half, and you will see that each of you has $150,000 in equity.
To calculate the amount of the buyout, the formula is this:
- Equity/2 plus any debt (since you would be assuming the debt by yourself)
Continuing the example, you would need to pay your ex $150,000 while assuming the $200,000 mortgage. If you were refinancing, you would need a new loan of $350,000.
You can use the Hello Divorce Home Equity Buyout Calculator to determine the split of the equity between you and your spouse.
How to buy out a house during a divorce
To buy out your house during a divorce, you have two options:
- Pay the remaining balance and the equity in cash
- Refinance your mortgage, and use the equity to buy out your ex
What Should You Do With Your Marital Home in Divorce? Explore Your Options.
Buying out the house when children are involved
If children are involved, buying out the house during the divorce can be more complicated. Courts usually allow the custodial parent to stay at the house without having to buy out the other spouse. The other spouse might pay for some of the maintenance of the house as a form of child support and spousal support.
If you are not the custodial parent, you might have to wait for months or even years to buy out the house or sell it. The courts will give your ex and the kids time to find a new place to live before anything happens to the house.
Is a home buyout taxable?
Once the buyout is complete, the sale is considered part of the divorce. Thus, the spouse who sold their share of the house will not be affected by capital gains tax.
However, if you bought out your ex, stayed in the house for some time, and then later sold the house to a third party, that sale would be subject to capital gains tax.
Note: If you’ve lived in the house for more than two years from the time of the divorce to the sale, or if you qualify for one of the IRS exceptions to the rule, you have the right to exclude the first $250,000 of gains from the tax.
ReferencesHow to Sell or Retain a Home During a Divorce. HG.org.
Real Estate and Divorce. Michigan Legal Help.
Who Gets the Real Estate in a Divorce? (December 2022). Realty Biz News.
Divorce and Your Mortgage: Here’s What to Know. (June 2022). Bankrate.
Home Equity Loan Calculator. (March 2023). Forbes.
Follow These Steps to Keep the House After Divorce. (July 2019). Forbes.
Tax Considerations When Dividing Property in Divorce. (March 2013). Journal of Accountancy.
Broken Home: Divorce and the Principal Residence. (August 2009). Journal of Accountancy.