The answer is maybe. “Equity” is the difference between what your house is worth (fair market value) and what is owed on the property.
Assuming your house is community property, the equity will be divided equally between you and your spouse.
Example: The house was purchased during marriage and title was taken in both of your names. Neither of you used “separate” funds for the down payment, which would be money inherited, earned before marriage or received as a gift by one of you.
Let us assume the fair market value is $700,000 and $500,000 is owed on the property. The equity would be $200,000. Each spouse should receive $100,000.
There are several options:
- One spouse can buy the property from the other.
- The house can be sold and the net proceeds divided.
- You and your soon-to-be former spouse can agree to delay the sale until a certain date or event occurs. For instance, you may agree to wait until your child graduates from high school to avoid having to enroll him or her in another school.
There are things to consider when deciding what to do.
- If you want to buy your spouse out you will need to qualify for a new mortgage on the property which you will be solely responsible for (unless you get another person to co-sign with you). This requirement is designed to protect the party who will no longer have an ownership interest in the property from being responsible for payments. We advise our clients to talk with several lenders to determine if they can qualify for a new loan. Also, keep in mind that you may be able to offset part of what you will owe your spouse with other assets that will need to be divided. For example, you can trade an interest in a bank account (in whole or in part) or other property to pay your spouse his/her share of the equity.
- If you decide to sell the house and divide the proceeds you will have to pay the costs of sale, which can be steep. While selling the house is often the easiest solution, careful consideration should be given to the possible capital gains that may need to be paid upon the sale.
- If you decide to delay the sale of the house you will be entering into a co-ownership arrangement with the person you are divorcing. You need to be clear on all details, like who will pay for the maintenance on the property and how rental proceeds will be divided. What if the house needs a new roof? What if it falls down in an earthquake? These “deferred sale” agreements can work but the risks need to be carefully assessed.
If you both want to keep the house a court will need to decide the issue. If you cannot agree on the value of the property you will both probably need to have it appraised and let the court determine which value is accurate.
We are almost always able to resolve this issue once we are clear on what the property is worth, who can afford to keep it, and what the division of all of the other assets and debts looks like. Do not try to decide this immediately. Once the divorce process is underway more information is available which will make this decision clearer.