In divorce, your marital property is subject to equitable distribution. That means the property you and your spouse acquire during the marriage will be fairly divided between the two of you. Equitable distribution can include your marital home. Typically, your house is either sold with the proceeds divided between the two of you, or one of you may buy out the other’s share if one of you wants to keep the home. If one of you wants the house and is willing to buy out your spouse’s interest in the home, the best thing to do is negotiate a purchase price that is mutually acceptable to you both as fighting over the marital home will generally result in the dispute going to a judge which you don’t want for the following reasons:
1. The judge will order the sale
If you can’t agree on what to do with your home, the judge will simply order its sale and the money will be divided between you. While an exception may be found if there are minor children and the custodial parent wants to stay in the home with the children, certain circumstances will still need to be met including that both parents can afford to maintain the home, among other things.
2. A judicial sale can also trigger capital gains taxes for both parties
If your house has significantly appreciated in value, you may have to pay capital gains tax when it is sold. There presently exists a $250,000.00 per spouse exemption under federal tax law that may apply. If your capital gains tax exceeds the $250,000.00 per spouse exemption, both parties will owe whatever amount in taxes is due over the exemption. While it may be remotely possible to defer capital gains taxes with a 1031 exchange, this is not a likely option. Thus, it’s best to speak to a tax professional for advice in the event the marital home is sold.
To the extent you negotiate the disposition of the marital home without court intervention, you may be able to shift the capital gains and transfer tax liability if you sell your interest in the marital property to your spouse. Many lawyers are not savvy enough to include a provision for these taxes in the divorce settlement agreement. Consequently, if the agreement merely provides for you to sell your interest to your spouse for a designated sum, your spouse may become fully responsible for these obligations. To be sure, rights and obligations not stated in a fully executed settlement agreement are, as a general rule, waived. Thus, if the agreement is silent regarding payment of these taxes, your spouse may lack any remedy to go after you for your share of these taxes.
It is often best in divorce conflicts to try to settle the property dispute yourselves, rather than going to court. It gives you the flexibility to negotiate terms that are better than what you may get from a judge or at least, compromising can reduce the costs and risks associated with litigation. If you are considering divorce, contact us to discuss how we can help you achieve the best result in your matter.
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