Divorce is never easy, even in a no-fault state like California. It’s a business transaction in which both parties have a fiduciary duty, and that means a lot of paperwork is involved. The more shared assets you have, the more complicated it gets. Aside from your children and family, businesses, real estate, bank accounts, investments, and taxes all get involved, and you’re lucky if things can be settled amicably without any ill will or hard feelings.
This lengthy process drags out for a year or more, and one of the biggest looming questions is what will happen with the home. While most people want to keep the house, it’s not always possible. While you as a couple may have qualified for a mortgage, neither of you may qualify individually. It’s a stressful situation but one that needs to be addressed.
The good news is you’re not alone. A prominent divorce firm estimates there are ~2.9 million divorced people living in this state. Santa Monica and Santa Barbara are the California cities with the highest divorce rates. Divorce happens, and once you have a plan of action in place to take care of the kids, you don’t want to waste time in starting a new life.
One major question remains, and the answer depends on a variety of personal factors. The only consistent factor is that you want it done and over with as quickly and painlessly as possible.
Should You Sell the House Before or After Divorce?
When it comes to divorce, you have the option of either selling prior and splitting the profits with your spouse or selling after, with the profits going to whomever is listed on the mortgage.
Each has pros and cons, and it may not even be voluntary. Sometimes, even with the best of intentions, you may find yourself forced to sell after agreeing to keep the house. You don’t want to simply abandon the house, however, no matter how much of a battleground it may have become. This is a major investment, and you have a lot of emotions invested in it.
Those emotions easily get heated when you and your spouse disagree on the outcome, but don’t let spite get in the way of your potential profits. The timing of your home sale will impact a variety of factors, including the sale price and how long it must (or even can) stay on the market.
The average home in Los Angeles stays on the market for 79 days prior to sale, which is 11 days higher than the national average of 68 days. You should discuss these options with your spouse if possible, to ensure you can both live with the outcome.
Benefits of Selling Your House During Divorce
Selling your house before divorce gets all the important paperwork and legal proceedings out of the way up front. This can be a strategic move with several benefits.
1. Tax benefits of selling your house during divorce
Selling your house prior to or during the divorce is going to give you the best tax write-off, according to the 2013 California real estate tax law. Married owners can exclude up to $500,000 capital gain from the home sale if:
- They file a joint tax return for the tax year the sale takes place
- If either spouse meets the ownership test
- Both spouses meet the use test
- And neither spouse has recently excluded a gain within the past two years.
Each individual person can qualify for up to $250,000 capital gain exclusion after the divorce, but once you start moving and filing individual tax returns, the clock is ticking.
If you sell after the divorce, it becomes harder for one or the other spouse to meet the ownership and use tests, which include owning and using the home as primary residence for at least two years of the five-year waiting period.
2. Legal benefits of selling your house in divorce
Should one or the other spouse choose to keep the house, it’s going to come with legal consequences. California law dictates that a spouse or domestic partner taking a house with equity would also need to either give up something equitable or take on equivalent debt to maintain an equal net share of assets you own as a couple.
By selling the house up front, you have a specific dollar amount to list in the divorce decree and divide evenly. It’s less work for you, your lawyers and accountants, and the courts. Everyone wins.
3. It’s a fast split
Selling the house during divorce isn’t easy, but it’s the quickest way to metaphorically rip the Band-Aid off and move on with your separate lives. Divorce is never simple – in fact Dartmouth University’s Life Change Index Scale lists divorce as second only to the death of a spouse or child as the most stressful life events.
It’s not easy to sell your house now, but it’s not going to get easier with time. The fact is, there’s a reason you’re getting a divorce, and holding onto this house may keep you immersed in it and suffering for a lot longer than necessary.
Benefits of Selling a House After Divorce Agreement
Of course, selling a house after divorce can be a better option in some cases. It’s possible you’re even reading this article after your divorce was finalized and don’t have the option to choose.
If that’s your reality, here are the benefits of selling your house post-divorce:
1. A Rental Property can be lucrative
Owning real estate is a great investment, and turning your home into a rental property can be a great income opportunity. There are approximately 3.7 million married couples who run businesses together, according to the most recent Census data available.
The New York Times profiled some of those couples who divorced and continued running small businesses together, providing tips on how to do it.
2. You have a place to live
Divorce is an expensive and time-consuming ordeal. Aside from dividing everything you own in half, Lawyers.com estimates the average cost and timeframe of divorce to be $17,500 over 15 months in California.
Couples with kids are at the high end, costing $26,300 over 18.2 months, versus couples without kids paying $17,100 over 11.7 months. Keeping the house gives you a (relatively) comfortable place to live throughout this complicated process.
3. You can better time the market
If both of your names are on the mortgage and the two of you can come to a written agreement, you can hold onto your home until you reach a specific equity or profit margin on the sale.
Be careful though – real-estate site Zillow surveyed 100 market analysts who predict a housing recession in 2020, so you need to decide fast, or you could be stuck waiting another 10 years if the market takes a downturn.
Listing Your Home vs Selling Direct for Cash – Which Is Better?
When you decide to sell your home, there are a lot of costs and a whole other process involved that will add to your divorce. Realtor.com estimates the average listing agent commission is roughly 6% of the home sale price, which equates to about $15,000 on a $250,000 home. Closing costs add another 2% to the price you’ll pay to sell your home.
Selling a home also requires performing repairs, refinishing/repainting, and home staging, which can be quite costly. Staging a home for sale is a lot different than living in it, and if you both abandon the home during a divorce, it’s going to be a lot harder to sell. Maximizing your profits requires you to cut out the unnecessary middlemen.
Realtors – Unnecessary Middlemen?
We have nothing against realtors, but the fact is, you can save a lot of money by selling your home yourself. You’ve likely seen advertisements around town offering to buy your home for cash.
While it sounds like it’s too good to be true, real estate investors can give you fair market value for your home up front in cash without the need to list your home on the MLS as For Sale by Owner (FSOB), or even stage it.
Real estate investors don’t need a loan approval process, because we directly purchase the home with cash to remove slow bank processing times, agent commissions, and the hassle of preparing your home for sale.
If you’re looking for a way to quickly liquidate a home, either before or after a divorce, selling direct for cash to a real estate investor is a great way to do it.
Avoiding a Slow Market
As discussed above, real estate analysts believe the housing market could enter a recession in 2020. This could affect your home’s resale value, along with extending the time it’s stuck on the market. That will inevitably increase costs associated with listing your home.
You’ll be paying the mortgage and utility bills for an empty house while keeping up with rent/mortgage on your new home and struggling with divorce costs.
Selling your home for cash is the quickest way to cut ties and gain liquidity to move on with your life. It’ll get you out of your shared real estate investment prior to any possible recession with cash on hand to invest in other ventures more suitable to your risk appetite. Those investments will be solely yours, without the reminder of your ex haunting you daily.
Divorce is a long, drawn out process that’s never easy for anyone. It would be nice if it were as fast and easy as your wedding, but every year of your marriage added more to a pile that must now be evenly distributed for the sake of everyone in both families. No matter how clean the break, the residual effects will live on for the rest of your lives.
Once care of the kids is decided, everyone must figure out who’s going to live where and how to evenly divide the assets. Taxes, investments, businesses, real estate, and debt must all be considered and discussed. If you’re lucky, you can get through all the paperwork amicably. Even in those cases, a fast sell can be necessary, and that’s not getting easier in a slowing market.
Selling a house in divorce gives both parties (and the court) a firm understanding of the financial value and profits going to each party. It has tax benefits for a short window of time too, as the capital gains from the sale will be taxed both federally and locally. Holding it, however, can be a lucrative business if both parties can work together.
Whether you sell the house before or after divorce, odds are pretty good that you want to minimize the time and maximize your profits as much as possible. The best way to do this is to sell your house to a real estate investor.
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