How Do I Buy Out a House From a Spouse?
You can buy out your spouse's interest in the house and do it right
How do I buy out a house from a spouse and avoid costly mistakes?
On this page we answer the question of how you can buy out the house from your spouse. We will show you how California law treats the topic of buying out a spouse's community property interest in the house. We also discuss how to avoid common mistakes.
As we discussed in the preceding article, spouses can agree to sell the home or the court can order the sale of the home if the spouses do not agree. The same is true with a buyout.
Let's go through the house buyout process.
Buying out a house from a spouse requires an appraisal and careful math
A buyout of a house is essentially one spouse paying the other spouse one-half of the other spouse's community property interest in the house. Do the simple math. If a house has $500,000 equity and the spouses agree all of that equity is community property, one spouse can buy the other one out of his or her interest in the house by paying that other spouse $250,000.
Does a buyout of a house from a spouse during a divorce include a deduction for costs of sale?
You may be thinking, hold on a second, why should it be $250,000? Shouldn't there be a deduction for the cost of sale such as escrow, commission, etc. because my spouse would have gotten less if we sold it?
You may be right and your spouse may have received less if the house was sold. However, you and your spouse did not sell the house so we believe most judges would not order costs of sale deducted when there was no sale.
Spouses are of course free to agree to whatever they want in such a situation but in our experience a buyout of a house means paying the other spouse 50% of his or her community property interest.
When buying out a spouse's interest in a house during a divorce, the focus is on community property interest
Notice we wrote community property interest and not the entire equity. It is possible a house is not 100% community property. Using the same example as above but also assuming the spouse buying the other one out has a $100,000 separate property interest, we would take the $500,000, deduct $100,000 as separate property and that leaves us with $400,000.
The spouse paying the buyout would then pay the other spouse $200,000 to buy out the community property interest.
Does a buyout of a house from a spouse during a divorce have to be a cash exchange?
Does it have to be the payment of money? No, it does not. A buyout can actually occur through an offset of another asset.
Again, to use simple math, assume the same $500,000 hypothetical and assume all of it is community property. Now assume the spouses have a brokerage account with $500,000 in it. For the sake of our hypothetical and to keep it simple, we will not get into the tax consequences or financial advantages or disadvantages of trading cash for equity.
In such a situation, one spouse can keep the brokerage account and the other spouse can keep the house assuming it is a dollar for dollar or close enough trade.
If I buyout my spouse's interest in the house during the divorce, what happens with the mortgage?
Now if you put some thought into this, you may be thinking, but what about the loan on the property? Is a spouse who is being bought out on the hook for that loan? We certainly hope not.
The spouses should be smart enough to negotiate terms for the one keeping the house to remove the one being bought out from the loan or refinance or modification. The spouses are free to agree to whatever terms they want in such a situation.
We have seen situations where the buyout must occur within 90 days. We've also seen a situation where the spouses agree for the buyout to occur years later.
What happens if the loan modification is not successful?
No matter what the agreement is, there is usually a fallback position such that if the refinance or modification is not successful, the houses is sold. That is because most spouses do not want to be on the hook for an entire life of the loan, especially when they don't even live at the house anymore.
The above is only some of the scenarios a buyout of a house from a spouse may occur
Through good communication between spouses and their lawyers and good communication between the lawyers, spouses should with very rare exceptions be able to work out such buyout provisions in a matter that is reasonable for both sides.
Want some good news? We have some great additional reading for you on the topic of dividing real estate during a divorce. Click on the links below to learn more about this topic.