In so many of our divorce cases, one party wants to keep the marital home. Over the years, the attraction to keeping the marital home has gone through many ups and downs. Think back to 2007-2009, most of our clients had negative equity, and no one wanted the home, but also no one could get rid of the home because they couldn’t sell it for what they paid for it, much less at a profit. It was devastating. Many clients had dumped their whole life savings into their homes just to realize a few months later that life savings was gone. Homes dropped by the $100s of thousands, and no one expected that in sunny San Diego!
Following that spiral, the housing market bounced back as it always does and then skyrocketed. For a solid 10 years, the market was pretty consistent, allowing couples to stay in their homes, easily refinance at the same low rates (or lower) that they already had, pull some cash out to buy out the other spouse, and move on with a reasonably priced monthly mortgage payment (reasonable for Southern California, that is… not for the rest of the world).
Until now, the current market. I write this in 2024, where houses are going for top dollar, and the interest rates are higher than they have been in…30 years? I may be exaggerating, but not by much. Now clients can’t refinance to remove the other partner – going from 3% or even 4% (or for the lucky ones 2.5%) interest rate to 6-7% interest is a deal breaker. It increases monthly mortgages by a couple thousand dollars, and seriously, who can afford that? The current market creates a situation that requires couples to get creative if there is a desire for either partner to stay in the home (which is often the desire of both partners – that one of them stays in the home with the kids for a defined period of time). Since the “good old days” of a semi-painless refinance are gone, mediation provides a safe space to explore the possibilities and determine if one of those possibilities may work for your family. Mediation provides a flexible environment that is literally dictated by what YOU and YOUR SPOUSE want – not by what the law says MUST happen. At San Diego Family Mediation Center, we embrace client-centered mediation and will ALWAYS support what the clients want and will do all we can to make sure you can maintain control of your future – even if the law doesn’t believe you can, we do!
In California, when one spouse wants to buy out the other spouse’s interest in a marital home during a divorce, the court generally focuses on determining the fair market value of the property and ensuring an equitable division of assets. However, specific factors like costs to sell the house or capital gains exclusions typically do not directly influence the buyout value unless the property is being sold as part of the divorce settlement. Further, and a concern given the current market, courts generally prefer to avoid situations where both parties remain financially tied to a property after a divorce, especially if one spouse is no longer living in the home. However, the specific circumstances of the case can influence the court’s decision.
Here are some key points to consider if this issue were to take place in court:
- Fair Market Value: The buyout price is usually based on the current fair market value of the home minus any outstanding mortgage or other encumbrances. An appraisal is often conducted to determine this value.
- Costs to Sell: If the house is not being sold, costs that would be associated with selling the house (like real estate commissions, closing costs, etc.) are generally not deducted from the buyout value. The buyout focuses on what the home is worth, not on hypothetical selling costs.
- Capital Gains Tax Exclusion: Capital gains tax exclusions, such as the $250,000 (or $500,000 for married couples) exclusion on the sale of a primary residence, are also typically not factored into the buyout process. These exclusions are relevant if the house is sold, not if one spouse is buying out the other.
- Equitable Division: The court’s goal is to divide marital assets equitably. If a buyout is agreed upon, the spouse keeping the house might need to offset the other spouse’s share with other assets or cash. The court may consider the overall financial circumstances of both parties to ensure a fair outcome.
- Refinancing the Mortgage: Typically, if one spouse is awarded the home and the other spouse is to be bought out, the spouse keeping the home is required to refinance the mortgage in their own name. This releases the other spouse from liability on the mortgage.
- Interest Rates and Refinancing: If interest rates have risen significantly, making refinancing less favorable, the spouse keeping the home might be hesitant to refinance. However, this does not mean the court will force the other spouse to remain on the mortgage indefinitely.
- Court’s Decision: While a court cannot force a lender to remove one spouse from the mortgage without refinancing, it can impose conditions. For example, the court might allow a temporary delay in refinancing or set a deadline by which the refinancing must be completed.
- Liability on the Mortgage: If refinancing is not feasible due to high interest rates, the court might consider other solutions, such as ordering the sale of the property or structuring the buyout differently to protect the financial interests of both parties.
- Risk of Remaining on the Mortgage: If one spouse remains on the mortgage, they are still financially liable even if they are no longer an owner of the property. This can impact their credit and ability to secure future loans. Courts are generally aware of these risks and aim to avoid such outcomes.
In summary, in a court setting, the buyout process focuses on the current value of the property rather than on potential future costs or tax implications that would only arise if the property were sold. When dealing with the rising interest rates making it challenging for most individuals to afford to refinance their homes at the current rates, while a court cannot directly force one spouse to stay on the mortgage permanently, it can delay the refinancing requirement in certain situations. However, the court will also seek to protect both parties’ financial interests and may explore alternative solutions.
If you are facing a divorce and are seeking to explore creative solutions when it comes to your home, please reach out to us and we can help!
