“Who will keep the house in a California divorce” is a pivotal question. At times, it’s easily answered because neither spouse can afford or wants to keep the house. More often, it’s a confounding question that spouses must examine from multiple perspectives.
How does a couple decide who will keep the house in a California divorce?
The method to decide who will keep the house in a California divorce depends on whether the divorcing couple engages in mediation, collaborative divorce, or goes to court. If a couple collaborates and negotiates a marital settlement agreement they can use any criteria to determine whether they’ll sell their home or if one or both spouses will keep it indefinitely or in the interim.
In the negotiation process spouses and their lawyers raise logistical and legal questions like these:
- Is the house separate property or community property?
- Was the legal character of the house changed from separate to community, community to separate, or separate to separate during the marriage and if so, will the spouses honor or challenge the transmutation?
- Did a spouse use separate property such as trust funds to make the downpayment, pay the mortgage principal, or remodel the home, and if so, how much is the California Family Code § 2640 right of reimbursement?
- If the house is one spouse’s separate property, did the community acquire an interest in the separate property home?
- If the community acquired an interest in a separate property house, what’s the cash value of the community property interest?
- What is the fair market value of the home?
- What is the equalization payment that one spouse will pay to buy-out the other spouse’s interest in the house?
- What are the tax consequences if a spouse keeps the house in the divorce and sells it thereafter?
- Can the spouse who wants to keep the house qualify for a mortgage and pay ongoing costs?
- Is it feasible for the couple to co-own the property, and if so, how would they handle the maintenance, management, and sale?
- Is it wise to defer the sale of the house?
- Is keeping the house in the best interest of the children?
- Do extraordinary circumstances warrant one spouse keeping the house (e.g., ADA compliant, home business, inheritance)?
How do you decide if you should keep the house after divorce?
If you’re thinking about keeping the house after divorce, roll up your sleeves and answer these questions before you ask a judge or your spouse if you can keep the house in divorce.
Do you truly want to keep this house? Ramit Singh Sethi, is a graduate of Stanford University, author of the 2009 New York Times Best Seller, “I Will Teach You to Be Rich”*, and host of the Netflix series “How to Get Rich.” Unlike many other financial advisors, Ramit says that owning a home doesn’t always build wealth, so you should only own a home if it’s truly what you want.
If you’re thinking about buying out your spouse’s interest and taking on the weight and responsibility of homeownership, be sure it’s what you truly want. Ask yourself questions like these to uncover your motives.
- Does the thought of moving scare and staying comfort you?
- Do you love the neighborhood and community?
- Is your attachment to the home ego-based or heart-centered?
- Have you customized the home to meet your special and professional needs?
- Did you raise your children or bury your beloved pets on the property?
- Is this your childhood or intergenerational family home?
- Can you let go and move forward if you stay in the marital home?
- Does keeping the home align with your long-term desires?
- If you keep the house can you pursue your passion?
- Are other people’s opinions influencing you?
- Is this the most sensible choice and is being sensible what you must be?
If you truly love your home, you might find that keeping it will give you (and your children) a place to heal and cultivate purposeful new lives. In Jane’s case, Jane truly wanted to keep the house for her children to minimize the disruption and stay in the school district. Jane had a photography studio set up downstairs, which was a vital consideration. John like Jane, wanted the kids to continue living in the only home they’d known and placed great value on the fact that Jane working from home meant she could easily care for the kids while John was at his office. Pat on the other hand envisioned a minimalist life and financial freedom to live abroad, which she could do if she agreed to sell the home and invest her share into other income-generating assets. Pat’s spouse was happy to list the house for sale at the height of the market and maximize the capital gains tax exclusion.
If you know you truly want to keep your home or you’re on the fence, closely examine the feasibility of homeownership with your advisors. Consider the following (and many more related) questions.
Can you actually afford to keep the house? Homeownership is a costly undertaking. The costs of owning a home include the initial purchase or buy-out price plus the ongoing expenses, which can include mortgage payments, property taxes, homeowners insurance, home maintenance and repairs, utilities, Homeowner Association (HOA) fees, and often, unexpected assessments. To avert financial disaster, it’s essential to crunch the numbers including the actual historical costs of the house, your personal expenses (e.g., cars, kids, groceries, education, entertainment, debt repayment,) and all existing reasonably predictable sources of income. Consider the income and assets that would remain available to you after you paid your spouse the buy-out price and any child and spousal support obligations.
Work with an experienced and trustworthy Certified Financial Planner, Certified Divorce Financial Analyst, and tax advisor who will examine the affordability question closely from all angles and give you a professional opinion about whether it’s financially feasible to keep the house. Don’t be overly optimistic about phantom and precarious sources of income. Be pragmatic and don’t let your heart overrule your head if the risks exceed your risk tolerance. Keeping an unaffordable home can lead to bankruptcy and rob you of peace of mind.
Should you liquidate or trade other assets to keep the house? To source the buy-out payment you might liquidate, borrow against, or trade other assets you have an interest in like stocks and pension funds. Whether you should do any of these things depends on the true cost of each option. A number of questions to consider with the help of a financial advisor are:
- If you sell stock to keep the house will you pay significant taxes, and if so, how much and how soon?
- Will there be penalties for withdrawals from retirement accounts?
- What’s the future value of the pension benefits you may relinquish?
- If you sell stock or funds that pay dividends or waive monthly pension payments, will you have a sufficiently stable income from other sources to meet your present and future needs?
- Will you have a six-month or one-year safety fund?
Will you qualify for a mortgage? If the house is a community property asset and you must buy out your spouse’s half of the equity, do you qualify for a loan that will release your spouse from all secured loans and pay the buy-out price? Do you have a good credit score and history of income that a lender considers sufficient to qualify and make loan payments? It isn’t uncommon for a divorcing person to refinance community property mortgages and draw additional equity from the home to pay the buy-out price, but in the California real estate market, it’s often cost prohibitive.
What should you do if your ex keeps the house? Saying goodbye to a home can be extremely difficult, especially if it holds fond memories. Relinquishing the asset to your soon-to-be ex, however, can give you a golden opportunity to start fresh. You might rent or buy a city loft or country farm in a neighboring county or distant country. Of course, you must consider the financial impact of moving afar, and if you have children, it might not be possible to relocate immediately, but you never know. If you long for a new adventure, your kids are in college, your career is portable, or you must start from scratch, don’t give up on your dreams in divorce. Set your sights and chart a course toward a new life you’ll love.
Who will keep the house if you ask a judge to decide? The answer depends entirely on the judge and the facts of your case. If one spouse has a significant separate property interest in the home or it was an inheritance or gift, the judge might award the house to said spouse. If a spouse has a disability or works from home and the house has been customized, the judge may accommodate the spouse with specific needs. If there’s a deadlock and no extraordinary circumstances exist, most California family court judges will order the sale of the house and divide the net proceeds according to California community property law.
*“I Will Teach You to Be Rich” is a book I recommend. If you use the link to buy the book it may generate an affiliate payment that will fund the operating costs of this website.