When a couple decides to divorce, what happens to the house will depend on several factors, including state law. The partners might continue to jointly hold the property, sell the home, or one could buy the other out.
Getting divorced is usually not an easy situation. Setting aside the major impact on one’s emotional life and family, it can be challenging to tackle what happens to the home and the mortgage, which often represent the biggest asset a married couple owns.
Here, you’ll learn the answer to important questions about divorce and your home, including:
• When you get divorced, what happens to the house?
• How does assumption of a mortgage after divorce impact taxes?
• How can your credit score be affected in a divorce with a mortgage?
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Who Gets the House in a Divorce?
In an ideal divorce scenario, spouses will agree on how all property will be divided (and address other major concerns, such as child custody and debt responsibilities). If you and your spouse are able to agree to all terms of the separation without needing litigation, you can get an uncontested divorce much more affordably.
But what happens to the house when you get divorced and can’t agree on things? That often comes down to where you live. State law can play a key role in the outcome.
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Divorce and State Laws
When you get married, it is your state, not the federal government, that awards marriage licenses. Just think about the classic marriage ceremony line, “By the power vested in me by the state of XYZ.”
That means, state laws, rather than federal laws, will impact property division and debts in a divorce. In general, you’ll be in one of two types of states:
• Common law property
• Community property
The type of state you live in will dictate how the judge will approach the division of assets in a divorce proceeding.
Note that prenuptial and postnuptial agreements can impact the application of these laws and the assumption of a mortgage (and other property) in a divorce.
Common Law Property States
In a common law property state (also called separate property state), a married couple can own assets separately, like a car. Some spouses may choose not to open a joint bank account; some may keep their earnings and their debts separate.
Living in a common law property state means one spouse can even make a major purchase, such as a house, solely in their name, with only their name on the deed. However, that doesn’t mean that partner would necessarily automatically get the house in a divorce. Instead, common law property states use equitable distribution.
When engaging in equitable distribution, the judge will do their best to fairly distribute all assets. One spouse may get the house, but the other could get a mix of various assets roughly equivalent to the property.
Equitable distribution does not necessarily mean a 50/50 split. Instead, the judge will consider factors such as:
• How long you’ve been married
• How much each spouse earns, as well as future earning projections
• Your age and health
• Whether one spouse has another property to live in.
From these and other factors, the judge will attempt an equitable distribution of all assets that is fair, but not necessarily equal. The judge does not consider fault during these proceedings, even if one spouse is deemed responsible for the divorce, say, due to infidelity.
Most states are common law states, but you can check with a divorce attorney or your state’s website to understand the unique divorce laws where you live. Here’s a list of common law states:
• Alabama
• Alaska
• Arkansas
• Colorado
• Connecticut
• Delaware
• Florida
• Georgia
• Hawaii
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Maine
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• New Hampshire
• New Jersey
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• Tennessee
• Utah
• Vermont
• Virginia
• West Virginia
• Wyoming
Community Property States
Only a handful of states are considered community property states, which strive for an even split of all assets. When you get married in a community property (also called shared property) state, you own all assets acquired during the marriage together, no matter who purchased an item or took on a debt.
In such states, property must be divided 50/50. Because you can’t split a house down the middle, the court will work to find other ways to ensure equitable distribution of assets. (For instance, if one spouse gets a home with $30,000 of equity, the other spouse must receive $30,000 of equity in some other way.)
Here’s a list of community property states:
• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin.
Option 1: Sell the House and Split the Profits
The first and most obvious option for spouses to consider when getting a divorce is to sell the house and split the profits. If neither spouse wants to retain the house, this is ideal — both spouses can walk away with something to fund their next move, whether it’s an apartment, condo, or another house.
Of course, that can be easier said than done. Selling a house can be a lot of work, so you’ll need to get on the same page about who’s doing what to get the house ready, work with a real estate agent, and maintain the mortgage and other costs until it’s sold.
This may be your only option if neither you nor your spouse can afford (or wants to keep) the house on your own. Getting used to living on a single income can be a tough transition and require smart budgeting after divorce.
Pros
• It’s an easy way to split profits 50/50.
• If the market is good, both spouses could benefit.
• No one has to live in a house with difficult memories.
Cons
• Selling a house requires a lot of work.
• The market may not be favorable.
• Children from the marriage may not be ready to say goodbye to their home.
Option 2: Maintain a Joint Mortgage
Spouses who are able to remain civil and trust each other may consider keeping a joint mortgage for one of two reasons:
• Spouses can take turns living in the house and spending time with kids. This means kids don’t have to go back and forth from two places and can keep some routine in their lives in what’s an otherwise turbulent time for them.
• Spouses with a nice house in a great market can earn and split profits by renting out the home or using it as a vacation rental.
Pros
• There’s no complicated paperwork to transition an asset or difficult process to sell the house.
• Kids can retain a sense of normalcy by living in the home with their parents.
• In a good market, spouses can earn a profit by renting out the house together.
Cons
• Eventually, you’ll still likely want to sell the home. You’re simply putting it off now by retaining the mortgage.
• Ending a marriage is tough; there’s a cost of divorce, both financially and emotionally. Things might be civil now, but that can always change — and owning property together could be difficult.
• Without profit from the sale of the home, spouses may have difficulty finding a new place to live after the divorce.
Recommended: How to Prepare Financially for a Divorce
Option 3: One Partner Buys Out the Other
In an uncontested divorce, spouses may agree that one person can keep the house and the other will receive something else to be financially fair — money or other assets, usually.
But this can also be worked out in the courts during a divorce settlement. For instance, a spouse may choose to let their partner retain the house in exchange for not having to make alimony payments. Or the spouse not assuming the mortgage in the divorce may simply get the rest of the assets.
To ensure equitable compensation, the spouse not getting the house could even receive monthly payments from the spouse who retains the mortgage over a set amount of time. Divorce attorneys can get creative with these arrangements to find a solution both partners are happy with.
Pros
• There’s no urgency to sell the house.
• The spouse who wants to keep the house can retain it.
• The spouse who doesn’t want to keep the house gets compensated fairly in another way.
Cons
• This isn’t necessarily an easy decision if both spouses want to keep the house.
• Because home values can go up or down, the split may not be equitable in the long run.
• A fight over the house in court could make the divorce more acrimonious (and difficult for any children involved).
Tax Implications
Fortunately, there aren’t major tax implications if you get the house in a divorce. The IRS does not treat property transfers between spouses — even those divorcing — as a sort of financial gain or loss. Instead, you’ll treat the property as gift income for taxes, but the property value is not taxable.
As with most aspects of taxes, there are always exceptions. Reach out to a tax accountant, or review IRS guidelines if you have questions.
Credit Score Implications
Property distribution in a divorce won’t directly impact your credit score either. That said, if you are the spouse who does not retain the house, your name will no longer be on the mortgage loan. That affects your credit mix and length of credit history, which can impact your score in the long run.
Similarly, if you are the spouse who is assuming a mortgage after divorce, but you suddenly find that you’re struggling to make on-time payments because of your new financial situation. You could risk damaging your score by falling behind on payments.
And what if a spouse stops paying a mortgage during a divorce, when your name is still on the loan? That can indeed hurt your credit score, so it’s crucial that you and your spouse work together to make sure you’re making these and other shared payments every month.
Recommended: Am I Responsible for My Spouse’s Debt?
How Refinancing Can Help
If you are the spouse who keeps the home in a divorce, the court may require you to refinance to get your ex’s name off the mortgage.
Doing this can be great not just for the convenience of getting their name off the loan. You may be able to work with a lender to obtain a more manageable monthly payment based on your single income. Depending on your credit and the current market conditions, you might even get a lower interest rate.
In this case, refinancing a home mortgage could be an advantageous move for you.
💡 Quick Tip: Have you improved your credit score since you made your home purchase? Home loan refinancing with SoFi could get you a competitive interest rate with lower payments.
The Takeaway
Divorce can often be a tough and tumultuous time. One of the big financial decisions to make is what happens to the house when your union ends. The state you live in may impact how the court rules in the division of assets. You may both continue to hold the property jointly, sell it, or one partner might buy the other one out. And if you end up with the house, you may need to (or want to) refinance your mortgage to make payments more manageable. Working with a divorce lawyer may be your best bet for navigating all these difficult questions and decisions.
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