Home Equity During Divorce Settlement: How to Split, Buyout, or Sell the Marital Home

Dividing home equity is often the most complex financial aspect of divorce. Your home likely represents your largest asset, holds emotional significance, and involves ongoing obligations through the mortgage. Whether you're buying out your spouse, selling the property, or navigating contested ownership, understanding your options and protecting your interests is essential.

This comprehensive guide covers everything you need to know about home equity in divorce: valuation methods, division strategies, buyout calculations, tax implications, refinancing requirements, and common pitfalls to avoid.

How Home Equity is Divided in Divorce

Community Property vs. Equitable Distribution States

Your state determines how marital assets—including home equity—are divided.

Community Property States (9 states):

• Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin

Rule: Marital property divided 50/50 unless prenup says otherwise.

Marital property: Anything acquired during marriage, regardless of whose name is on the title.

Separate property: Assets owned before marriage, inheritance, gifts to one spouse.

Equitable Distribution States (41 states + DC):

• All other states

Rule: Marital property divided "equitably" (fairly), not necessarily equally.

Factors courts consider:

• Length of marriage
• Income and earning capacity of each spouse
• Contributions to marital property (financial and non-financial)
• Age and health
• Custody of children
• Tax consequences
• Future financial needs

Result: Equity split might be 60/40, 70/30, or other ratios based on circumstances.

What Portion of Home Equity is Marital Property?

Scenario 1: House Purchased During Marriage

• Typically 100% marital property
• Even if only one name on deed
• Both spouses entitled to share of equity (subject to state laws)

Scenario 2: House Owned Before Marriage

• Pre-marriage equity: Separate property of owner spouse
• Equity gained during marriage: Marital property
• Mortgage paydown during marriage: Marital contribution

Example:

• Spouse A bought home before marriage for $200,000
• At marriage: Home worth $250,000, mortgage $150,000 (equity $100,000)
• At divorce: Home worth $400,000, mortgage $100,000 (equity $300,000)
• Spouse A's separate equity: $100,000
• Marital equity: $200,000 (to be divided)

Scenario 3: Inherited or Gifted Home

• Typically separate property of receiving spouse
• Unless: Commingled with marital funds or spouse's name added to title

Example: Spouse B inherits home, adds Spouse A to deed, uses joint income for improvements → likely becomes marital property.

Valuation: Determining How Much the Home is Worth

Accurate valuation is critical—it affects how much equity exists to divide.

Valuation Methods

1. Professional Appraisal (Most Common)

• Licensed appraiser evaluates home
• Provides formal written report
• Compares recent sales of similar homes
• Cost: $400-$600
• Timeline: 1-2 weeks

Advantage: Objective, defensible, acceptable to courts and lenders.

Who pays: Often split between spouses or ordered by court.

2. Broker Price Opinion (BPO)

• Real estate agent provides estimated market value
• Less formal than appraisal
• Based on [comparative market analysis](/blog/how-much-is-my-house-worth) (CMA)
• Cost: Often free (from agent hoping to list property)

Advantage: Fast, low/no cost.

Disadvantage: Less authoritative than appraisal; can be biased.

3. Automated Valuation Model (AVM)

• Online estimates (Zillow Zestimate, Redfin Estimate)
• Algorithm-based, no physical inspection
• Cost: Free

Advantage: Instant, free.

Disadvantage: Inaccurate (often off by 5-20%), not reliable for legal settlements.

4. Agreed-Upon Value

• Spouses agree on value without third-party
• Avoids appraisal cost

Advantage: Fast, cheap if both agree.

Disadvantage: Risk of over/undervaluation; can lead to disputes later.

Equity Calculation

Home Equity = Market Value - Outstanding Mortgage - Selling Costs (if applicable)

Example:

• Market value: $500,000
• Mortgage balance: $300,000
• Gross equity: $200,000

If selling:

• Market value: $500,000
• Mortgage: $300,000
• Realtor commission (6%): $30,000
• Closing costs (2%): $10,000
• Net equity: $160,000

Critical: Decide whether to use gross equity (if one spouse keeps home) or net equity (if selling).

Three Primary Options for the Marital Home

Option 1: Sell the Home and Split Proceeds

How it works:

• List home for sale
• Pay off mortgage at closing
• Split remaining proceeds (net equity)
• Both parties walk away clean

When this makes sense:

• Neither spouse can afford home alone
• Too much conflict to co-own
• Both want fresh start
• Market conditions are favorable

Process:

1. Agree on listing price and realtor
2. Cooperate on preparing home for sale
3. Review and accept offer together
4. Close on sale
5. Split proceeds according to settlement agreement

Advantages:

• Clean break
• No ongoing financial tie
• Liquidity (cash instead of equity)
• Market determines value (less dispute)

Disadvantages:

• Selling costs (6-8% of home value)
• Possible capital gains tax (if profit exceeds exemption)
• Children must leave family home
• Both need to find new housing
• Market timing risk (selling in down market)

Option 2: One Spouse Buys Out the Other

How it works:

• One spouse keeps home
• Pays other spouse their share of equity
• Refinances mortgage in their name only (removing ex-spouse)

When this makes sense:

• One spouse wants to keep home (often custodial parent)
• Can afford mortgage and buyout
• Wants stability for children
• Emotional attachment to home

Buyout calculation example:

Scenario:

• Home value: $400,000
• Mortgage: $250,000
• Equity: $150,000
• Each spouse's share (50/50): $75,000

Spouse A buys out Spouse B:

• Spouse A pays $75,000 to Spouse B
• Spouse A refinances mortgage in own name
• Spouse B removed from deed and mortgage

Where does buyout money come from?

Option A: Cash Payment

• Spouse A pays $75,000 from savings, inheritance, or other assets

Option B: [Cash-Out Refinance](/blog/cash-out-refinance-guide)

• Spouse A refinances mortgage for $325,000
• $250,000 pays off existing mortgage
• $75,000 cash out to pay Spouse B

Option C: Trade for Other Assets

• Spouse B forgoes home equity
• Receives equivalent value in retirement accounts, investments, or other property

Option D: Deferred Payment / Promissory Note

• Spouse A pays Spouse B over time (e.g., $1,250/month for 5 years)
• Typically with interest
• Secured by lien on property

Option E: Hybrid

• Partial cash payment, partial asset trade

Advantages:

• One spouse keeps home (continuity for kids)
• Avoids selling costs
• No capital gains tax ([primary residence exclusion](/blog/capital-gains-tax-real-estate) applies later)

Disadvantages:

• Buying spouse needs to qualify for new mortgage alone
• May require significant cash for buyout
• Refinancing costs ($3,000-$8,000)
• Spouse keeping home takes all future risk (and upside)

Option 3: Continue Co-Owning (Rare, Complex)

How it works:

• Both names remain on deed and mortgage
• One spouse lives in home (usually custodial parent)
• Both responsible for mortgage payments
• Agree to sell at future date (e.g., when kids finish school)

When this might make sense:

• Neither can buy out the other or afford new housing
• Want to delay selling (wait for better market, kids to graduate)
• Amicable divorce with high trust

Process:

• Detailed written agreement specifying:
  • Who lives in home
  • Who pays mortgage, taxes, insurance, maintenance
  • How long arrangement lasts
  • When/how home will be sold
  • How proceeds split

Advantages:

• Delays difficult decisions
• Preserves children's stability
• Both share in appreciation

Disadvantages:

• Ongoing financial entanglement with ex-spouse
• Both liable for mortgage (affects credit and DTI for future loans)
• Disputes over maintenance, repairs, costs
• If one spouse defaults, both affected
• Hard to sell/refinance without other's consent

High risk—avoid unless absolutely necessary and relationship is exceptionally cooperative.

[Refinancing After Divorce](/blog/buying-home-after-divorce): Removing Ex-Spouse from Mortgage

Critical issue: If the divorce decree says one spouse gets the home, but both names remain on the mortgage, the non-resident spouse is still legally liable.

Why Refinancing is Essential

Problems if you don't refinance:

For spouse keeping home:

• Ex-spouse could sabotage credit by not cooperating
• Harder to enforce mortgage payment responsibility
• Lender can still pursue ex-spouse if you default

For spouse leaving home:

• Mortgage shows on credit report (counts against DTI)
• Can't qualify for new mortgage easily
• Liable if occupying spouse defaults
• Credit damaged if payments missed

Solution: Spouse keeping home must refinance in their name alone, removing ex-spouse.

Refinancing Requirements

To qualify for refinance:

1. Sufficient Income

• Must qualify based on your income alone
• Lender uses standard DTI ratios (typically ≤43%)
• Include alimony/child support as income (if court-ordered and documented)

2. Adequate Credit Score

• Minimum 620 (FHA), 640+ (conventional)
• Higher scores get better rates

3. Enough Equity

• At least 3-5% equity required
• 20% equity avoids PMI

4. Stable Employment

• 2 years employment history preferred
• Consistent income

Refinancing with Buyout (Cash-Out Refinance)

Example:

• Home value: $400,000
• Current mortgage: $250,000
• Spouse's share of equity: $75,000

New mortgage: $325,000

• Pays off old mortgage: $250,000
• Cash to ex-spouse: $75,000

Requirements:

• Lender allows up to 80% LTV typically ($320,000 max loan on $400,000 home)
• Must qualify for $325,000 payment based on income
• Closing costs: $3,000-$8,000

Alternative if can't qualify for full buyout: Negotiate delayed or partial buyout, or trade other assets.

Timeline and Process

Divorce decree should specify:

• Spouse keeping home has X days to refinance (typically 60-180 days)
• If unable to refinance by deadline, home must be sold
• Protects both parties

Process:

1. Before divorce finalizes: Consult with lenders to pre-qualify
2. Divorce decree issued: Includes refinance requirement
3. Apply for refinance: Submit application, provide divorce decree
4. Underwriting: 30-45 days typically
5. Close on refinance: Ex-spouse signs quit-claim deed, released from mortgage
6. Ex-spouse receives buyout funds: At closing or via separate payment

Tax Implications of Dividing Home Equity

Capital Gains Tax

General rule: Profits from sale of primary residence may be excluded from capital gains tax.

Primary Residence Exclusion (Section 121):

• Single filer: Up to $250,000 profit tax-free
• Married filing jointly: Up to $500,000 profit tax-free

Requirements:

• Owned home at least 2 of last 5 years
• Lived in home as primary residence at least 2 of last 5 years

Divorce scenarios:

If selling immediately:

• If file joint return for year of sale, can claim $500,000 exclusion
• If already filed separately or divorced, each can claim $250,000 (if both meet requirements)

Example:

• Bought home for $200,000
• Sell for $600,000
• Profit: $400,000
• Tax owed (married filing jointly): $0 (under $500,000 exclusion)

If one spouse keeps home then sells later:

• Must meet 2-of-5 year ownership and residency tests at time of future sale
• If spouse who leaves can't meet residency test, may owe capital gains on their portion

Workaround (IRC §121(d)(3)(B)):

• Spouse who moved out can still qualify if:
  • Moved out pursuant to divorce decree or separation agreement
  • Ex-spouse continues living in home
  • Complex rules—consult tax professional

Transfer Between Spouses (No Immediate Tax)

IRC §1041: Transfers of property between spouses incident to divorce are tax-free.

What this means:

• Quit-claim deed from one spouse to other: No immediate tax
• No gift tax
• Receiving spouse assumes original cost basis

Example:

• Home originally purchased for $200,000
• Spouse A transfers their share to Spouse B in divorce
• Spouse B's cost basis remains $200,000 (not stepped up)
• When Spouse B sells later, gain calculated from original $200,000 purchase price

Mortgage Interest Deduction After Divorce

Spouse who keeps home:

• Can continue deducting mortgage interest (if itemizing)
• Subject to standard limits ($750,000 of acquisition debt post-2017)

Spouse who moved out but still on mortgage:

• Cannot deduct mortgage interest (not their primary residence)
• Still liable for debt
• Another reason refinancing is critical

Common Divorce Home Equity Scenarios

Scenario 1: Custodial Parent Wants to Keep Home

Situation:

• Mom has primary custody of two young children
• Wants kids to stay in family home for stability
• Dad agrees but wants his equity

Solution:

• Appraisal: $450,000
• Mortgage: $280,000
• Equity: $170,000
• Dad's share (50%): $85,000

Options: A. Mom refinances for $365,000 (cash-out), pays Dad $85,000 B. Mom trades Dad her share of his 401(k) ($85,000 value) C. Dad agrees to deferred payment: $850/month for 10 years (plus interest)

Mom refinances in her name, Dad signs quit-claim deed, both move forward.

Scenario 2: Neither Can Afford Home Alone

Situation:

• Home worth $300,000, mortgage $200,000, equity $100,000
• Neither spouse qualifies for $200,000 mortgage on single income
• Kids are teenagers

Solution:

• Sell home
• Net proceeds after selling costs: ~$85,000
• Each receives $42,500
• Both find more affordable housing

Alternative (rare):

• Co-own until youngest child turns 18 (3 years)
• Mom lives in home, both split mortgage payments
• Sell after child graduates, split proceeds
• High-risk; requires detailed written agreement

Scenario 3: Home Underwater ([Negative Equity](/blog/negative-equity-explained))

Situation:

• Purchased home at peak 2021 for $500,000
• Market declined 15%, now worth $425,000
• Mortgage: $450,000
• Underwater by $25,000

Options:

A. Short Sale

• Both agree to sell with lender's approval
• Lender accepts less than owed ($425,000 vs. $450,000)
• Deficiency ($25,000) may be forgiven or pursued
• Credit impact for both

B. Continue Co-Owning Until Equity Positive

• Wait for market recovery
• Both remain liable for mortgage
• Risky, requires cooperation

C. One Spouse Takes Full Responsibility

• Spouse A agrees to keep home and pay full mortgage
• Spouse B signs quit-claim deed (gives up ownership)
• Spouse B negotiates release from mortgage (difficult without refinance)
• Spouse A assumes all risk and potential future equity

Scenario 4: One Spouse Owned Before Marriage

Situation:

• Husband bought home 3 years before marriage for $250,000
• At marriage: Worth $300,000, mortgage $180,000 (equity $120,000)
• Married 10 years
• At divorce: Worth $500,000, mortgage $100,000 (equity $400,000)

Calculation:

• Husband's separate equity (pre-marriage): $120,000
• Equity gained during marriage: $400,000 - $120,000 = $280,000
• Marital equity to divide: $280,000
• Wife's share (50%): $140,000

Resolution:

• Husband refinances for $240,000
• Pays off remaining $100,000 mortgage
• Pays wife $140,000 buyout
• Husband keeps home

Protecting Your Interests: Essential Tips

1. Get Independent Legal Advice

Each spouse needs their own attorney:

• Protects your rights
• Explains implications of settlement options
• Negotiates on your behalf
• Reviews all documents

Don't share an attorney—conflict of interest.

2. Obtain Professional Appraisal

Don't rely on:

• Zillow estimates (often inaccurate)
• One spouse's opinion
• Realtor friend's casual estimate

Get formal appraisal:

• Objective
• Defensible in court
• Informs fair settlement

3. Consider All Costs in Buyout

If buying out spouse, factor in:

• Appraisal cost
• Refinance closing costs ($3,000-$8,000)
• Ongoing sole responsibility for:
  • Mortgage payment
  • Property taxes
  • Insurance
  • Maintenance and repairs

Can you truly afford it on one income?

4. Document Everything in Divorce Decree

Ensure decree specifies:

• Who gets house (or that it will be sold)
• Refinance deadline (if one spouse keeping home)
• What happens if refinance fails (forced sale)
• How sale proceeds split (if selling)
• Who pays mortgage until refinance or sale
• Responsibility for repairs, taxes, insurance during transition

Vague language leads to disputes later.

5. Remove Name from Mortgage ASAP

If giving up home:

• Ensure ex-spouse refinances promptly
• Don't accept promises—require action
• Until refinance complete, you're still liable

Protect yourself:

• Monitor mortgage payments (set up alerts)
• Maintain proof of who's living in home
• Document violations of divorce decree

6. Plan for Tax Consequences

Consult tax professional about:

• [Capital gains exclusion](/blog/home-sale-exclusion-guide) eligibility
• Timing of sale (file jointly vs. separately)
• Cost basis implications
• Alimony and child support structuring

Tax mistakes can cost tens of thousands.

7. Update Estate Planning

After divorce finalizes:

• Update will and trust
• Change beneficiaries (life insurance, retirement accounts)
• Update title/deed on home
• Review power of attorney and healthcare directives

Red Flags and Mistakes to Avoid

1. Agreeing to Keep House You Can't Afford

Emotional attachment ≠ financial wisdom

Be realistic:

• Can you qualify for refinance alone?
• Can you afford payment, taxes, maintenance on your income?
• What if you lose job or income decreases?

Better to sell and downsize than foreclose later.

2. Letting Ex-Spouse Stay on Mortgage While You're Not on Deed

Recipe for disaster:

• You have no ownership rights
• Still liable for mortgage
• Can't stop ex from defaulting, damaging your credit
• Can't sell or refinance without ex

Never agree to this.

3. Quick-Claiming Deed Before Refinance Happens

Sequence matters:

Correct: Refinance first, then quit-claim deed Wrong: Quit-claim deed first, then try to refinance

Problem: If you quit-claim before refinance, ex-spouse has ownership but you're still on mortgage. If they then can't/won't refinance, you're stuck.

Always: Refinance and quit-claim simultaneously at closing.

4. Underestimating Selling Costs

Selling costs 6-8% of home value:

• Realtor commission: 5-6%
• Closing costs: 1-2%
• Repairs/staging: 1-3%

On $400,000 home:

• Gross equity: $100,000
• Selling costs: $28,000
• Net equity: $72,000

Each spouse gets $36,000, not $50,000.

5. Ignoring Market Timing

Forced to sell in down market:

• May get significantly less than expected
• Could even end up underwater

If possible, negotiate timeline flexibility:

• Wait for better market
• Spring/summer typically best selling season
• Avoid rushed distressed sale

6. Not Considering Children's Needs

Stability matters:

• Keeping kids in family home, school, neighborhood
• Weighing emotional cost vs. financial cost
• Minimizing disruption during difficult time

Sometimes worth financial sacrifice; sometimes not. Consider holistically.

Related Articles

• [Accelerated Equity Building Strategies](/blog/accelerated-equity-building-strategies)
• ADU Permitting Timeline by State: How Long Does It Really Take?
• Cash Out Refinance Guide
• Detached vs. Attached ADU: Costs, ROI, and Financing Compared
• Building a Detached Home Office: Costs, Permits, and Financing

FAQ: Home Equity and Divorce

What happens to home equity in divorce?

Home equity is typically divided as part of marital property division. In community property states (9 states), it's split 50/50. In equitable distribution states (41 states), it's divided fairly based on factors like length of marriage, income, contributions, and child custody. Options include selling the home and splitting proceeds, one spouse buying out the other, or (rarely) continuing to co-own.

Can I force the sale of the marital home in divorce?

It depends on your state and circumstances. If you can't agree, the court will decide. Courts often order sale if: (1) neither spouse can afford buyout, (2) there's significant conflict, or (3) it's most equitable. However, courts may award home to custodial parent for children's stability if that parent can afford it. Consult a divorce attorney in your state.

How do I buy out my spouse's share of the house?

Determine home value (appraisal), subtract mortgage, calculate equity. Your spouse's share is typically 50% of equity (varies by state and contributions). Pay your spouse via: (1) cash savings, (2) cash-out refinance, (3) trading other assets (retirement accounts, investments), or (4) promissory note with payments over time. You must also refinance the mortgage in your name alone to remove your ex-spouse.

Do I have to [refinance after divorce](/blog/refinance-after-divorce)?

Not legally required, but highly recommended. If the divorce decree awards you the home but your ex remains on the mortgage, they're still liable for the debt. This affects their credit, DTI ratio, and ability to get new loans. Most divorce decrees require refinancing within 60-180 days. If you can't refinance, the home is typically sold.

What if I can't qualify to refinance the house alone?

If you can't qualify for refinancing based on your income alone, your options are: (1) add a co-signer (non-ex family member), (2) delay refinance to increase income (get court extension), (3) negotiate smaller buyout amount (reduces loan needed), (4) sell the home instead, or (5) explore non-QM lenders with alternative qualification criteria.

Can my ex-spouse force me to sell my inherited home?

Generally no, if the home was inherited by you alone and you didn't add your spouse to the title or commingle marital funds significantly. Inherited property is typically separate property. However, if you added spouse to deed, used marital funds for mortgage/improvements, or lived there as marital residence, it may have become marital property. Consult a divorce attorney immediately.

Is home equity split 50/50 in divorce?

In community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), yes—marital property is typically split 50/50. In equitable distribution states (all others), courts divide "fairly" based on factors like income, contributions, length of marriage, and child custody. This may result in 60/40, 70/30, or other splits. Prenuptial agreements can override default rules.

Conclusion: Navigate Home Equity Division Wisely

Dividing home equity in divorce ranks among the most financially and emotionally complex decisions you'll face. The marital home represents your largest asset, your children's stability, and often, years of memories. But clear-headed financial decision-making must guide your choices.

Key takeaways:

• Know your state's laws (community property vs. equitable distribution)
• Get professional appraisal for accurate valuation
• Weigh all three options: sell, buyout, or (rarely) co-own
• Refinance promptly to remove ex-spouse from mortgage
• Understand tax implications (capital gains, basis, deductions)
• Protect your interests with independent legal counsel
• Document everything in the divorce decree

Most importantly: Be realistic about affordability. Keeping the family home for emotional reasons while struggling financially hurts you and your children long-term. Sometimes the fresh start of selling and downsizing is the healthiest choice.

Whether you're buying out your ex, selling and splitting proceeds, or navigating contested ownership, make decisions based on cold financial reality, not emotions. Your future financial security depends on it.

If you're keeping the marital home and need to refinance, HonestCasa connects you with lenders offering competitive rates and divorce-specific expertise. Start your refinance application today and take control of your financial future.