Home Equity and Your Divorce: What You Need to Know

Posted On August 29, 2023 Divorce

One of the crucial aspects to consider during a divorce is the division of home equity. Home equity, defined as the market value of a home minus any outstanding mortgage or loan balances, can play a significant role in determining the financial settlement between divorcing spouses.

Understanding Home Equity in Divorce

Home equity forms a substantial part of a couple’s net worth, often representing one of the most valuable marital assets. For instance, if your home is worth $500,000 and you have an outstanding mortgage of $300,000, your home equity would be $200,000. The division of home equity can be influenced by several factors, including the time of acquisition, contributions made by each spouse, and applicable state laws.

Community Property State Laws

Washington is a community property state, which means that property acquired during the marriage is generally considered community property and is subject to equal distribution between spouses during a divorce. This includes the home and its equity, even if it is only in one spouse’s name.

Marital and Separate Property

It is essential to determine whether your home’s equity is marital property or separate property. Marital property includes assets acquired during the marriage, while separate property typically includes assets owned before the marriage or acquired through inheritance or gifts. Distinguishing the two will help you understand how home equity will be divided.

However, in Washington, the increase in home equity during the marriage is often considered community property, even if the home itself was separate property. This means that both spouses could have a claim to a portion of the increased equity.

Dividing Home Equity

When it comes to dividing home equity in a Washington divorce, there are several options to consider:

Sell the Home

One straightforward option is to sell the home and divide the proceeds between spouses. This can be an effective way to ensure a clean break and a fair distribution of the home equity.

Buyout

If one spouse wants to keep the home, they might choose to buy out the other spouse’s share of the home equity. This can be done by refinancing the mortgage or using other assets to offset the value.

Co-ownership

In some cases, couples may decide to continue co-owning the property for a certain period. This could be until the children are grown or until the real estate market is more favorable for selling.

Deferred Sale

This option involves delaying the sale of the home until a specific triggering event, such as the youngest child reaching a certain age. This allows both spouses to continue benefiting from the property’s value until the agreed-upon time.

Valuation and Professional Assistance

Accurate valuation of the property is critical for fair division. Hiring a professional appraiser can help establish a precise market value, which forms the basis for any division calculations. Moreover, enlisting the expertise of financial and legal professionals can guide you through the complexities of property division, ensuring your rights are protected and your interests are represented.

Pre- and Postnuptial Agreements

If a prenuptial or postnuptial agreement is in place, it might outline specific terms regarding property division, including home equity. These agreements can streamline the process by providing clear guidelines for asset distribution.

Tax Implications

It is crucial to be aware of potential tax implications when dividing home equity in a divorce. Consulting a tax professional can help you understand any capital gains taxes or other tax-related consequences associated with selling or transferring property.