The marital status of an individual does not affect his or her ability to buy and sell real estate in Colorado. This may not be the case once a couple has filed for divorce.
Once a divorce is filed an automatic temporary injunction is in effect which prohibits spouses from transferring marital property. The only way to sell marital property during a temporary injunction is if both spouses agree or by court order.
So what is marital property?
Any property acquired by either spouse during the marriage from the time it started until the time it ends is marital property. There are a couple exceptions to this rule and that includes property that was inherited by one spouse or property that was received as a gift by one spouse.
Is the real estate you own marital property?
Any property purchased during the marriage by either spouse, no matter which spouse is on a loan or on the title is marital property, unless it is a gift or inheritance to one spouse.
Property that was acquired by either spouse before the marriage is not considered marital property. However, the equity gains made on that property during the marriage is considered marital property. For example, Bob and Sue are married. Bob owned a town house before the marriage that he purchased in 1995 with cash for $150,000. In 2000, when he married Sue, the town house was worth $175,000. In 2005 when Bob and Sue filed for divorce the property is worth $200,000. So there was $25,000 in gains on the property during the marriage. That $25,000 of increase in equity of the town house is marital property to which Sue has some entitlement. Once the divorce is filed Bob could not sell this property and take the gains without Sue’s agreement.
Now, losses on property is an entirely different story. Let’s take the same situation, except let’s say that the equity of Bob’s town house went down during the marriage. The town house was worth $175,000 in 2000 when they married and in 2005 when Bob and Sue divorce the town house is now worth $160,000. This loss is Bob’s to bear. He may sell this town house during the divorce because there were no gains and no part of the town house is considered marital property.
Equity vs value
It is important to note the difference between value and equity in these situations. Let’s say that Bob bought his town house in 1995 for $150,000 but instead of paying cash, he took out a mortgage on it for $130,000. His equity at this point is $20,000. He marries Sue in 2000 and he has paid down his mortgage at this point to 120,000 and the value has gone up to 175,000. His equity at this point is $55,000. Let’s say that during the marriage he pays the mortgage off, but the value of the property dropped to $170,000. Even though the value of the property went down during the marriage, Bob’s equity in the property went up by $115,000 and that $115,000 in equity is marital property.
Gifts and Inheritances
Gifts and Inheritances received during a marriage are personal property, not marital property. Let’s say that Sue inherits a house during her marriage to Bob. The house is Sue’s personal property, however the gains made on that house during the marriage is marital property and Bob is now entitled to gains made on that property. Unless, Sue added Bob’s name to the title of the property she inherited during the marriage. If she adds Bob’s name to the title, then the property is now marital property. This is true with all gifts or inheritance whether property or money. The property or money must be kept in the name of the recipient only or it becomes marital property.
Dividing the family house
You have three options.
1. Sell the house and split the proceeds. This is the cleanest and easiest way to split the asset, however it may not always be ideal.
2. One spouse buys out the other. The value and equity of the home needs to be calculated to decide on a proper amount to be paid by the spouse keeping the home. If there are no other assets that can be used to offset the equity in the home, the spouse who is keeping the home may need to refinance to get the cash to buy out the other spouse. In fact, it is ideal for the spouse who is keeping the home to refinance the home in his or her own name and this may even be court ordered. This can become an issue if the spouse who wants to keep the house, is unable to obtain financing especially since this can hinder the other spouse from getting financing when he or she wants to purchase a new home.
3. Own the house jointly. This is an option that people may choose especially if they want the children to stay in the home until they graduate school. If you choose this option, you will need to pick an agreed upon time or event which triggers the sale of the house at some point in time.
Tax issues to consider
The IRS allows a $250,000 exclusion for singles and $500,000 exclusion for couples on the sale of a house for any home that you have lived in for at least two years out of the last five years of owning it.
Back to our example couple, let’s say that Bob and Sue own their home together. In their divorce, they decide that Sue will keep the family home for seven more years until her son graduates high school. At that point she will sell the home. When the seven years are up, she sells the home and has $400,000 in gains. If during the divorce, she took ownership in the home and took Bob of the title, she would now owe taxes on $150,000 in gains. If her and Bob kept the house together in both of their names, each of them could take the $250,000 exclusion for a total of $500,000 and pay no taxes on the gains in the sale of the property.
The Taxpayer Relief Act of 1997 allows Bob to still take his $250,000 deduction even though he has not lived in the home two of the last five years.
What if Sue got remarried to Joe three years after her divorce with Bob and Joe moved into the home that Sue and Bob own together and lived there more than two years prior to the sale of the home? When Sue sells the house, all three of them can take the $250,000 exclusion for a total of $750,000 in exclusions on the sale of that house.
A tip to make the sale of your home less stressful
If you and your spouse decide to sell your house come up with a plan ahead of time. For example, agree ahead of time on price drops including when you will do them and for what amount. You may decide together that if your house doesn’t sell, you will drop the list price by 10,000 every 30 days. Deciding this ahead of time, can reduce stress and fighting.
What if I want to sell the house but my spouse doesn’t?
It’s no surprise that divorcing couples don’t agree on everything. If you want to sell the house but your spouse will not agree to it, you cannot sell the house. If you cannot agree together, the court will decide how the house is handled.
Can I buy a new house before my divorce is final?
Yes, you can. However, be aware that any property that you purchase before the divorce is final is marital property. So make sure that you have an agreement with your spouse that the new house is your house and that he/she is on board with the plan.
Rent to own
During or after a divorce, you may not be ready to purchase a new home. This may especially be true for someone who has been a stay at home mom and may not be able to qualify for a new loan just yet. Rent to own may be a good solution for you at this point in your life. And especially if the housing market in your area is making significant gains, its something to look into.
For more information
For questions about divorce and how it affects buying or selling a home in Colorado call Courtney at 720-476-0370.
Courtney Murphy is a Realtor serving the Denver metro area and is a Certified Real Estate Divorce Specialist. Although any Realtor may be sympathetic to your situation, it is important while going through a divorce to work with a Realtor who has been trained to make sure that you make the best financial decisions during this very difficult time.