Real Estate & Divorce Blog: Divorce and Property Division: What Happens to the Home Equity?

What Is Home Equity?

Home equity is the difference between the current market value of your home and the remaining balance on your mortgage. In simpler terms, it’s the amount of ownership you have in your property. For example, if your home is worth $400,000 and you still owe $200,000 on your mortgage, your home equity is $200,000.

As a couple goes through a divorce, home equity becomes a key asset to be divided. Whether the home is sold, one spouse buys out the other’s share, or another arrangement is made, understanding how home equity is divided is critical.

How is Home Equity Divided in Divorce?

The division of home equity depends on various factors, including your state’s laws and the specifics of your situation. There are two main approaches to dividing home equity:

1. Community Property States

In community property states, any property acquired during the marriage (including the home) is considered jointly owned by both spouses. This means that, in the event of a divorce, the equity in the family home is usually divided 50/50.

However, there can be exceptions, particularly if the home was acquired before the marriage or if one spouse inherited or was gifted the property. In those cases, the home equity may not be split equally.

Community Property States Include:

• Arizona
• California
• Nevada
• Texas
• Washington
• Idaho
• Louisiana
• New Mexico
• Wisconsin
• Alaska (for couples who opt for it)

2. Equitable Distribution States

In equitable distribution states, property is divided based on what is considered "fair," but not necessarily equal. The court will consider a variety of factors, such as each spouse’s income, contributions to the marriage (both financial and non-financial), and the needs of any children.

In these states, the division of home equity is not always a 50/50 split. For example, if one spouse was the primary earner or contributed more to the mortgage payments, the court may decide that they are entitled to a larger portion of the home equity.

Equitable Distribution States Include:

• New York
• Florida
• Illinois
• Georgia
• Pennsylvania
• Ohio
• Michigan
• North Carolina
• Virginia

Factors That Affect the Division of Home Equity

While the state law plays a significant role in how home equity is divided, the court will often take several other factors into account, including:

1. Length of the Marriage

The longer the marriage, the more likely the court will lean towards a 50/50 split of the home equity. A short-term marriage may result in a different division based on the contributions each spouse made.

2. Financial Contributions to the Home

In many cases, the spouse who made larger financial contributions to the home (through paying the mortgage, for example) may receive a larger share of the equity. However, the court will also consider non-financial contributions, such as staying home to care for children or maintaining the household.

3. Children and Custody Arrangements

If there are minor children involved, the custodial parent may be awarded the family home or a larger portion of the home equity. This is often done to provide stability and continuity for the children, particularly if staying in the home is in their best interest.

4. Tax Implications

The tax implications of selling or transferring ownership of the family home can impact the division of equity. For instance, if one spouse buys out the other, they may need to pay capital gains taxes depending on the home's value. The court may take these tax consequences into consideration when dividing the equity.

What Are Your Options for Dealing with Home Equity?

When it comes to dividing home equity during a divorce, there are several options:

1. Sell the Home and Split the Equity

If both spouses agree to sell the home, the proceeds from the sale (after paying off any remaining mortgage) will be divided according to the division of equity agreed upon or ordered by the court. This is often the simplest solution, but it may not be ideal for everyone, especially if one spouse wants to remain in the home.

2. One Spouse Buys Out the Other

In cases where one spouse wishes to keep the family home, they may choose to buy out the other spouse’s share of the home equity. This requires the spouse keeping the home to refinance the mortgage (if it was previously held jointly) and secure enough funds to pay the other spouse for their portion of the equity.

3. Keep the Home as Part of a Larger Settlement

In some cases, the division of home equity can be part of a larger settlement, where one spouse takes a greater share of other assets (such as retirement accounts, savings, or investment properties) in exchange for the family home. This can be a good option if neither party is ready to move out immediately or if the home is too difficult to sell.

Final Thoughts

Dividing home equity during a divorce is a complex process that requires careful consideration of state laws, financial contributions, and personal circumstances. It’s crucial to work with professionals—such as a divorce lawyer and a real estate agent—who can help you navigate the process and make informed decisions that protect your financial future.

Whether you decide to sell the home, buy out your spouse, or explore other options, understanding the division of home equity will help you move forward with confidence and clarity.

If you're facing a divorce and need guidance on real estate matters, feel free to reach out to us for expert advice and support throughout the process.