Continuing to Co-Own the House After a Divorce

One of the most emotionally charged issues when dividing assets in a divorce is figuring out what will happen to the family home. The outcome typically involves the spouses:

• selling the house
• arranging for one spouse to purchase the other's interest in the house—a "buyout," or
• continuing to co-own the house.

When the spouses can't decide what will happen to the house, the court will. Most of the time, a judge won't order a couple to continue co-owning the house after the divorce unless both spouses agree to the arrangement. Rather, the court will order the house to be sold and divide the proceeds according to the state's property division laws.

In many divorces, though, the exes are able to cooperate and even benefit from continued co-ownership of the family home. Here's what you need to know if co-owning a house after divorce seems like a possibility in your situation.

• Situations Where It Might Be a Good Idea to Co-Own a House After Divorce
• Advantages of Co-ownership
• Risks of Co-ownership
• Other Options and Next Steps

Situations Where It Might Be a Good Idea to Co-Own a House After Divorce

When you're making decisions about whether to own property jointly after divorce, you'll have to consider not only emotional factors, but financial ones, as well—the family home is often the largest asset spouses own together. Couples often find that co-owning a house after a divorce is a good idea in the following situations.

· You Have Children Living at Home

Stability for children during and after the divorce is key. Many divorcing parents want to do everything they can to make sure that the divorce doesn't disrupt their children's lives. Co-owning the family house after divorce ensures that the kids won't have to move, and can help ease the stress associated with the divorce and their parents' new living arrangements.

· It's a Bad Market

Unless you need to cash out your interest in the house immediately, it might make sense to hold onto the house if you live in a buyer's market. Perhaps interest rates are high, there's a lot of other homes in your neighborhood for sale, or you just think waiting a bit will get you more money when you sell. All of these factors might be a good reason to hold onto the house until the market shifts so that both of you can maximize your profits when you eventually sell.

· You're Underwater on Your Mortgage

If, after consulting with a real estate professional and gauging the market in your area, you discover you and your spouse owe more on your mortgage than you could sell the home for, it means your mortgage is "underwater." Instead of selling, you and your spouse could hold the property, and maybe even rent it out to help cover your mortgage payments. You can use the hold time to make additional payments on the mortgage, or hope that the market takes an upswing and you can sell for more than you owe.

· Neither of You Is in a Position to Buyout the Other

To complete a buyout, one of you will have to either have enough property or cash on hand to buy the other's interest, or be able to qualify for a mortgage modification or refinance. Even when you both agree that one of you will buyout the other's interest in the house, it simply might not be financially possible at the time of the divorce. Continuing to co-own the house gives the purchasing spouse more time to save up.

· You'd Like to Keep the House as an Investment

If both you and your spouse have enough resources to be able to move out after the divorce, you could consider keeping the family home as a rental property. You could reach an agreement on how to share proceeds, and hire a property manager so neither of you has to be involved in day-to-day decisions and management.

Keep in mind that co-owing doesn't have to be forever—spouses can agree to hold onto the house until a specified event occurs, such as your youngest child's graduation from high school. (This is called a "deferred sale.") If you reach an agreement like this with your spouse, make sure to get it in writing and incorporate it into your divorce decree.

Advantages of Co-ownership

When you decide to co-own your house with your ex, it means that you'll both continue to be on the deed and responsible for paying the mortgage (if any). The arrangement requires a level of coordination that isn't worth it unless the pros outweigh the cons.

Consider these potential benefits of post-divorce co-ownership:

• makes it possible for the kids to remain in the same house after the divorce
• delays or avoids having to go through the stressful process of moving everyone out and selling the home at the same time as the divorce
• allows both exes to capitalize on any appreciation that occurs after the divorce
• potentially provides an alternative source of income if the property is kept as a rental, and
• avoids selling the property at a loss.

Risks of Co-ownership

Post-divorce co-ownership of the family home has its cons, too. The arrangement can be risky because it:

• Keeps both exes on the hook for paying the mortgage. Both exes' credit reports will show the entire amount of the mortgage. Having such a large debt on your record can make it difficult to get credit for other purposes. If your ex fails to pay the mortgage (or pays it late), your credit rating will take a hit.
• Requires close accounting to avoid financial or tax-related disadvantages. You must decide how you will share the mortgage and upkeep expenses, and who can take the mortgage interest tax deduction. For example, even if you pay equal amounts toward the monthly mortgage, you can agree that one ex-spouse gets to take the entire mortgage interest deduction, in exchange for increased support or some other equalizing payment. If you own the house together for a significant period of time after your divorce becomes final, you also risk losing the important tax benefit of IRS Section 1041, which is the rule that says transfers between spouses as a result of a divorce are not taxable. Section 1041 applies as long as the transfer takes place within a year of the divorce becoming final, or as long as it's "related to the ending of your marriage," which means it's made under a written agreement or order and occurs within six years of the date your divorce becomes final (after six years, you lose the tax benefit no matter what). So make sure you don't just make a handshake agreement. Make the agreement to keep the house a part of your written settlement agreement, and get the court to approve it so that it becomes a court order.
• Involves interaction with your ex. if you anticipate that co-ownership will make the emotional disentanglement more difficult, think twice before you agree to this long-term commitment. (If you're parents, though, you'll still have to interact with one another regardless, so adding co-ownership of the home to the mix might not be as much of a burden.)
• Subjects you to the whims and needs of your ex. It's possible that the spouse not living in the house might have a change of heart and want (or need) to sell sooner than anticipated. Your settlement agreement should set a specific time that the house can be sold—if it does, the agreement will govern. But anyone who's really determined to get out of an agreement can make your life miserable—for example, by claiming that the agreement was entered into under duress and forcing you into a court fight. So if you think the decision might not stick, don't make it in the first place. Another risk is that if your ex is sued by creditors or files for bankruptcy, their share of the house could be seized, possibly resulting in a forced sale. There's really no way to protect against this, so if you believe it's a possibility, don't go the co-ownership route.
• Requires additional estate planning. Think about your estate plan, and consider what would happen to the home if one of you died while you were still co-owners? Each of you has the right to decide who gets your share of the house at death. If you've agreed that one of you will stay in the house until the kids are a certain age, you could also agree that during that period you'll each leave your share of the house to the other. That would ensure that in the event of one of your deaths, the other spouse can stay in the house with the kids as planned. This requires that you both make wills immediately.

Other Options and Next Steps

If, after weighing the pros and cons, you decide that it's best not to co-own the family home after divorce, you and your ex have other options. The "clean and dirty" option is to sell the house and split the proceeds (or costs) equitably. The other common option is to arrange for one spouse to buy out the other's interest in the house. To protect your interests in either of these options, it's a good idea to hire an appraiser to tell you what the market value of the home is.

Deciding what to do with the family home after divorce is a big decision for any divorcing couple. And, because the transaction can involve a lot of money—both equity and debt—as well as emotional considerations, it's important to evaluate all your options. Find the right professionals to help you with your decision. For example, a good real estate agent can help you get a feel for the market, an accountant can help you with divorce-related tax issues, and a family law attorney can help you structure your plans with written, binding, and enforceable agreements.