Divorce and Real Estate - Part 1

If you are going through a divorce, first let me just say I’m sorry you have to go through it.  Your list of to-dos is perhaps a bit daunting, and near the top of that list would be deciding what to do about your house.  Usually, divorcing couples will end up in one of the following three scenarios to deal with the marital home:  

1. Sell your home and divide any resulting proceeds between the two spouses in some way (usually an even split).

2. One spouse buys out the other spouse in order to keep the home and assume the mortgage on their own, budget permitting.

3. One spouse invokes their Dower rights (more on that in this article) to remain living in the house for a specific period of time, which is normally when the youngest dependent turns 18.

If you choose the first option, to sell your Edmonton home with a real estate agent, there are good reasons for selling before your divorce, and good reasons for waiting until afterwards.  Considerations like your financial situation, your tax situation, and the timing in relation to the Edmonton real estate market should all be on your radar.  So, starting with a quick pros and cons approach to your choices might help.

Good reasons to sell first:

The funds you receive from selling your home can finance your next move. 
If one or both of you is motivated to move out quickly, liquidating this asset might be the best way to get into a new home without having to rent for too long.  Although you will be splitting the proceeds, you may get enough out of it for a downpayment on a new home to start the next chapter of your life.  Even if you’re not ready to buy something else, that freed up cash could fund all kinds of things, like the trip of a lifetime, or tuition to fulfill a dream.

Selling quickly means you can start fresh, sooner.  
It’s likely that you invested more than just money into your marital home; you have an emotional connection to it as well.  Prioritizing the home sale might help you rip off the band-aid, rather than having to linger there for too long.  Once you have some distance and living in a new abode, you might find it easier to communicate peacefully with your ex, which could help move the divorce along faster as well.  Of course, if you have children you will need to consider the impact that a quick move will have on them; but it might be better for them too.

Tax rules may be simpler if you sell before you divorce. 
Selling your home before you divorce may make it easier to liquidate your assets and make your next tax season a little less complicated.  On the other hand, if one of you is planning to keep the home, it means you can claim the principal residence exemption on the sale of it after the divorce, making the entire amount tax-free, so consider your options carefully. More on that in our next blog post, Divorce, PT 2 - Tax Implications. 

You are actually giving yourselves more time to sell it.
By putting your home on the market quickly, you have more time to sell it leading up to the final divorce.  With more time to sell, you are also much more likely to get the outcome you both want.  If the courts have to make those choices for you later down the line, both parties are much less likely to get what they want out of the home sale.

The potential downsides to selling first:

 The home selling process may slow down your divorce.
If you happen to be going through your separation during a sluggish real estate season in Edmonton, it could take much longer than you hoped to sell your home.  If you and your spouse are experiencing an acrimonious divorce process, this might be just too much to bear.  It also means you might take an inferior offer on the home just to sell it more quickly.  If this sounds like your situation, it might be better to wait. 

Cooperation for the success of the sale may be difficult to muster.
>Putting your home on the market will require both spouses to have open communication and find agreement on the terms of the sale, even just to set the sale price.  If tensions are high, this may not be possible and decisions will be made from an emotional place, rather than from reason.  Finding a real estate agent with plenty of experience in working with divorcing couples can help though, so make sure you choose your realtor carefully and ask a lot of questions.

If you’re worried the house may take too long to sell, remember that you can help to prevent that by working out a plan together and find consensus that the home must be sold as a priority.  If you have the patience, it would also behoove you to pause the divorce until the home is sold.  This may help to incentivize the sale of the home as quickly as possible for both parties, instead of one or the other changing their mind, or stalling for time in order to stay in the home.

Good reasons to sell after:

A slower transition is less pressure, and may allow for better communication.
Emotions run high during a divorce, even when it’s relatively amicable.  Sometimes one spouse might even delay the sale of the home as a tactic for their own best outcome.  If you wait until after the divorce is settled before selling, however, it takes that house off the table as a bargaining chip, so you can focus your efforts on the terms of your divorce first.  Those terms will include what to do with the house.  It might help you to get more money out of the home as well, since delaying the sale means you’re putting more payments towards your mortgage, and giving yourselves several more months - or even years - to allow the property to appreciate in value.

A quick note on taxes: if one of you is planning to keep the home as part of the divorce settlement, it means that whoever gets the house can claim the principal residence exemption on the sale of it after the divorce, making the entire amount tax-free, so consider your options carefully.

The potential downsides to selling after: 

A slower home selling process may feel like pressure if you are eager to tie up loose ends. As Christine Bartsch point out in her article, Is It Better to Sell Your House Before or After a Divorce?, “you’re still married to your mortgage even though you’re no longer married to your ex.”.  So, if you’re waiting to sell, you’ll need to make arrangements with your spouse about how the mortgage and bills will be paid and by whom until the home sells.   

Besides that, keeping the marital home while separated means that your home has now become a second property for at least one of you, and possibly both.  Second properties are taxed differently (more steeply) than a primary dwelling, and very few budgets can handle that much debt-to-income ratio.  In that case, you will likely need to wait longer before you can buy a new home to start your next chapter in life.  

Make a plan:

The best way to tackle your options is to sit down with your spouse and consider your options based on your unique situation. Review the three most common scenarios for selling your home due to divorce; selling, buying out your spouse, or staying in the home (based on Dower rights). Hopefully looking at these considerations will help you clarify your home selling choices if you’re preparing for divorce.  If you’re looking for more tips, our next post, Divorce Part II, will be all about tax considerations and your home. 

For more information about the real estate buying or selling process, please reach out to our team who will be happy to help!