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What Can Happen to the Marital Home in a Divorce?

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What Can Happen to the Marital Home in a Divorce?

The pension benefits that have accrued over the marriage to either party and the equity in the marital home are often the most valuable marital assets at divorce. As part of a martial settlement agreement one spouse may convey his or her ownership interest in the marital home to the other spouse. In the alternative, the martial home may be required to be sold to a third party at dissolution or postponed to a later date which is often when the youngest child turns 18.  Between dissolution and the subsequent sale date one spouse and the children ordinarily continue to live in the marital home.

Five different settlement options for disposition of the martial home are potentially available, depending on each couple’s individual facts and circumstances.

Option #1:  Inter-spousal Cash Sale

Under IRC § 1041, if one spouse sells his or her interest in the marital home to his or her spouse “incident to the divorce,” no gain or loss is recognized upon the sale.  The purchasing spouse does not get a step up in basis related to the purchase price paid.

Option #2:  Inter-spousal Promissory Note,

An inter-spousal sale is appropriate in circumstances where one spouse wants the family residence but insufficient community property assets exist to provide the other spouse with an equitable marital property division. The acquiring spouse ordinarily uses his or her separate property to purchase their spouse’s share of the couple’s equity in the home.  A common complication arises where the existing mortgage holder insists that the existing mortgage be full paid off under a common “due-on-sale” clause where it discovers the pending or subsequent transfer. If the acquiring spouse may have difficulty paying off the existing mortgage without first obtaining alternate financing, the spousal sale can be made conditional on him or her first securing adequate financing.

Promissory note is being considered it is important that there is sufficient equity in the family residence to secure the debt obligation. Title insurance is also advisable to define and protect the priority position of the deed of trust in the event of foreclosure.

Option #3:  Sale to a Third Party

The parties may determine that the best way to move forward is to liquidate the equity held in the family home. This determination may occur for a variety of reasons including concerns regarding maintaining the home following the divorce.

Option #4:  Continued Joint Ownership Pending a Deferred Sale,

The most common reason a differed sale is contemplated is where there are insufficient other community property assets available to be able to award the residence to one spouse as part of an equitable and fair marital property division, and a sale between the spouses may be an economic impossibility.

Please note that where a deferred sale is agreed to or ordered by the court the court order should specifically prohibit the non-possessory spouse from living in the residence in order to enable a full section 121 exclusion when the home is ultimately sold that is available under IRC §121(e)(3)(B).


During the period after separation while the divorce is pending and before the ultimate sale of the residence, the parties or the divorce court will need to determine which party, or if the parties share responsibility, in what ratio will the parties be responsible for the mortgage payment, property taxes, maintenance, property insurance. An advisable clause in any agreement or court order addressing this issue, is that Neither party is legally entitled to further encumber the residence without the other’s party’s prior written consent.

Option #5:  Awarding the Residence to one Party as Part of an Overall Equitable Division of Community Property

The final option involves the award of the marital home to one party as part of an overall equitable division of the marital property. this settlement should contemplate all aspects of the shared marital property and applicable tax considerations that may apply under §1041 or other provisions of the U.S. Tax Code