What Happens to Property After a Divorce?

What Happens to Property After a Divorce?

Divorce involves more than ending the legal partnership between two spouses. It also involves dividing the household assets and debts. 

Different states handle divorce and property in different ways. Most states divide property by equitable distribution. This means that the marital property is divided “fairly,” though it may not be equal.

However, some states are community property states and divide property equally between the spouses. These states are Arizona, California, Idaho, New Mexico, Texas, Washington, and Wisconsin.

Let’s take a look at what you need to know about property division in a divorce.

Divorce and Property: What Happens Next?

Divorce doesn’t have to mean complicated. If there are few assets or no children, you can file an uncontested divorce. This can save time and money through a streamlined court process.

However, many divorces include dividing and valuing assets or child custody. If there is conflict, it can be hard to work out the issues with your soon-to-be-ex-spouse. You will want to find a lawyer that can help with your divorce.

Sometimes spouses going through a divorce can work out a division of the assets. An attorney can give advice on divorce and property rights and help draw up the divorce settlement.

However, if spouses cannot reach an agreement, then courts will end up dividing the property according to the state’s laws. 

Community Property

One of the first things to examine is the assets of the marriage. All earnings and everything acquired with those earnings throughout the marriage is part of community property. Examples of community property include wages, the home, the furniture, vehicles, any investments, and business income.

With divorce and community property states, the marital property is evenly split. In states with equitable distribution, a higher share of the property may go to the higher-earning spouse.

Community property is not determined by the name of the spouse on the property. For example, bank accounts, 401ks, and other assets may be only in one spouse’s name but are still considered community property. 

Community debts are also divided according to the state’s laws. These can include the mortgage or other loans, credit card debt, and medical bills. 

Separate Property

Not everything in a marriage is part of community property. If one spouse receives a gift or inheritance during the marriage, it is known as separate property. Separate property can also include anything acquired before or after the marriage.

It is possible for separate property to intermingle with community property. A business owned prior to the marriage that increases in value during the marriage might be an example, depending on the circumstances.

Student loans that were acquired before the marriage remain a separate debt. If the student loans were acquired during the marriage, then it depends on the state. Community property states would consider this to be community debt. 

What Happens to The House?

While a court may divide your assets, some of the assets cannot simply be “cut in half” – such as the home. You may end up being awarded a percentage of the home’s value, but then what happens?

If the house was acquired during the marriage, it is community property. If one spouse bought the house prior to the marriage, the other spouse might still receive some form of compensation for the time spent together in the home. 

Staying in the House

Often one spouse will end up staying in the house. Children and the custody arrangement may play a factor in this decision. The agreement may include that the spouse that stays in the house will pay the mortgage.

One spouse could also buy the other spouse out. In this case, the spouse that stays in the house pays the other spouse for that spouse’s share to become the sole owner.

However, the bank does not care about a divorce decree when it comes to the mortgage. This is where the house could get messy. In order to remove a spouse from liability on the mortgage, the loan would need to be refinanced.

The spouse that remains in the house would need to qualify for a loan on his/her own. If that spouse does not qualify alone, the bank will not refinance the house. This means that the spouse who no longer lives there could still be liable if the residing spouse is unable to make payments.

Other Options

A way to “split” the house would be to sell the house. The mortgage would be paid off, and the ex-spouses would split the proceeds. The ex-spouses could also continue to co-own the house and sell it in the future and split the proceeds at that time. 

If a buyout is not possible, the home’s value can also be offset by other assets. For example, one spouse keeps the house, and another spouse receives investments. However, this does not solve the issue of liability for the mortgage.

Transfer of Assets

As you divide your community property during a divorce, you will likely need to transfer ownership of some assets. The IRS will not consider this a taxable event as long as divorce is the reason.

However, if you have assets that have gained value during the marriage, such as stocks, bonds, or mutual funds, you could be subject to a capital gains tax when you attempt to divide the assets. You may also need to pay taxes if you sell your home.

After Your Divorce: Next Steps

An attorney can help you sort out the community property, community debts, and separate property of your marriage. You can also seek help from an accountant or tax professional about the potential tax implications of transferring assets.

Once your divorce is final, you should also take steps to review your estate plan, will, and power of attorney. Otherwise, you may find yourself unintentionally leaving property and decisions in the hands of your former spouse.

However your divorce and property settlement ends up, make sure that your interests are protected. You want to end up with the property you are entitled to have.