The U.S has the sixth-highest divorce rate in the world, holding steady at 50% for decades. If you are considering divorce (or are already in the process) and hold shared property with your spouse, it’s important to understand what might happen to it as you dissolve your marriage.
What is shared marital property?
In every state in the U.S., marital property includes only that which is acquired during the marriage. This property may be acquired individually, or the couple may purchase it together.
Separate property is not included in the division of marital assets. Many states explicitly designate which types of property are not included in any divorce agreements. These might include:
- Property an individual owned before marriage
- Inheritances
- Individual personal injury awards or gifts
This gets complicated when married couples share a joint bank account and use it to improve any properties they own, separately or together. It’s best to consult a lawyer in your state for specific guidance. Real estate attorneys can also help guide this process, but they may not be specialized enough to counsel homeowners as they divorce.
How courts control the division of shared property
Under equitable distribution laws, shared property is divided equitably between the divorcing partners. In this case, “equitable” doesn’t always mean “equal” — one spouse may get more out of a property than the other. This division is decided by:
- Individual income when the couple married
- Any shared debt
- The length of the marriage
- Age and health of each person
- Which spouse is the legal and physical custodian of any children
- Any financial losses due to the divorce
- Sacrifices made by one spouse for the other (i.e., one spouse quitting their job to raise the children)
Shared property assets also include life insurance policies. It can be tricky to be tied to your former spouse literally until death parts you, but in most states, life insurance rebates are illegal. This can be included in the evaluation of shared assets — even if it takes a lifetime to collect.
There are nine states that have community property laws that divide everything 50-50, regardless of the above factors. They are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Five others — Alaska, Florida, Kentucky, South Dakota, and Tennessee — allow couples to opt-in to community property laws.
Options for shared property division
Many people opt to sell their shared property. But dividing shared property does not always mean you’ll need to list your house for sale right away when you divorce. There are other options for splitting up assets without selling.
Equalization payment
An equalization payment comes out of a spouse’s separate funds and is used to balance out unequal property division. For example, if the house is worth more than one person’s assets, the other person can offer a cash payment to balance the difference.
Offering a buyout
A buyout is a good option if you want to keep shared property in a divorce. The most common way to buyout a spouse is to apply for a cash-out refinance that puts the home in your name and gives you enough capital for the buyout. This can be tricky if your credit is not good or you have limited equity in your home.
Deferred sale
Some divorcing couples opt to co-own the home together for a designated period of time. This might be court-ordered to create a stable home environment for children. If the housing market is weak or the house is not selling, this is also a good option.
Protecting yourself in a divorce
Divorce is a highly charged, emotional subject. This is not the best frame of mind to be in when it comes to making tough financial decisions, but it is critical to protect your financial interests in a divorce. Even spouses with the most amicable intentions can struggle to be fair in the division of assets. This is also critical when it comes to both marital and separate debt.
Get an appraisal
Whether or not you sell your marital real estate, it’s critical to get an appraisal. This updated assessment of a house’s value guides everything from setting a potential sale price to figuring out if a capital gains tax will fall on the spouse who elects to keep the property.
Mind the tax burden
And speaking of taxes, there are other tax considerations beyond the sale of a house. Even if assets appear equal on the surface, the way they are taxed can be wildly different. A $100 stock and a $100 bill are not worth the same amount of money. If that stock rises in value and you sell it, any profit you make is taxed. Tuck the $100 in a sock drawer and it doesn’t cost you a dime.
When a spouse declares bankruptcy
Some spouses may go so far as to declare bankruptcy to avoid paying their fair share of joint property. In general, bankruptcy does not include taking your house, but it will seriously damage your credit, which will continue to impact you down the road.
The bottom line
You have options when it comes to dividing shared property after a divorce. Talk to an attorney to see what is best for you.
