Divorce & Your Home – Part 3: A Buy-Out

You may be thinking about divorce and hearing the term “buy-out”.   Let’s assume that you both own the house and only one of you – let’s say you – want to own the house by yourself.  Then you may buy-out your spouse’s interest in the house.  To make a buy-out work, you need to give your spouse something of value.  You can do a buy-out around the time of the divorce and even after.  Will a buy-out will work for you?  Read this post to find out.

What are Some Common Buy-Out Terms? 

The Payment.    As the buyer, you may make the payment with cash from your bank or brokerage account.   If you don’t have enough cash available (and most people don’t), think about other options.  Perhaps you can transfer to your spouse a portion of a retirement account or refinance the mortgage for more than the balance due.  Before making any of these transfers, first speak with your collaborative attorney or mediator.

Releasing spouse from liabilities.   If you are buying the house, you should expect to refinance any mortgages or liens on the home that are in your spouse’s name.  The seller usually wants to be released from all debts associated with the house.  Why?   The seller spouse may want to purchase their own home or car.  Without a mortgage release, the seller spouse may not qualify for a mortgage because of the debt to asset ratio.  Also, without a release, the seller spouse will continue to be legally and financially responsible for payments.

When?  There are several timing questions.  When should the buy-out cash payment be made and when should the release occur?   You will also decide when the transfer of ownership (signing the quitclaim deed) will happen.    If you are buying the home, your first step may be to consult with your mortgage lender or broker about refinancing.   For purposes of qualifying for a refinance, the timing of the divorce and the timing of receipt of support can make a difference.

How Much Should the Payment Be?

First, reach an agreement on the fair market value of the home. The fair market value of your home is the amount that someone would pay to purchase it on the open real estate market.  You can hire a real estate appraiser for a neutral valuation.  Also, you can ask 2-3 real estate brokers to give you their opinions.  Be careful not to confuse listing price with expected sale price.

Second, calculate the balance due on loans associated with the property.  Most homes have a mortgage.  If you have a mortgage, find out the balance due.  If you have a second mortgage or home equity loan or other lien on the house, determine the current balances due.

Now you are ready for the math.  Calculate the “net equity” in the home.  The net equity  is often the fair market value less the outstanding balances of all liens on the property.   Sometimes clients will consider other factors that affect the net equity.  For example, if the buyer spouse plans to sell the property in a couple years, you may consider reducing the net equity by some or all of the future anticipated real estate brokers fee.   You can agree to share in the net equity 50/50 or something else depending on what is fair and reasonable in your situation.

Tax and Title Insurance Issues.

Think about when and if there will be federal capital gains taxes due on the sale of the house.  Usually a buy-out will not trigger potential federal capital gains taxes as long as it is properly described in your court approved Separation Agreement and occurs in the proper time frame.   As the buyer, you  should know that the buy-out will not affect your cost basis in the property.    Therefore, if you pay to your spouse $100,000 as the buy-out, you will not be able to include such a payment into your cost basis for the house when you sell it in the future.  Consult with your accountant about these tax issues before agreeing to a buy-out.

You also may want to consider your title insurance.  If you had purchased private title insurance, you may want to check to see if the insurance will provide coverage to you after the buy-out.

How do we decide?

As your a divorce mediator or collaborative attorney, I will help you discuss this issue with your spouse.  Together you will make decisions that are best for you and your family.  Contact me here to schedule a meeting.