Divorce Home Buyout Calculator
To calculate a home buyout in a divorce, gather the following information:
- Home’s current market value. It’s strongly recommended that this comes from a home appraiser.
- Remainder of mortgage
- Each spouse’s ownership percentage
- Selling costs
A basic formula is home value minus mortgage balance divided by each spouse’s share. So if both spouses own a home 50/50, for a $500,000 home with $300,000 of the mortgage outstanding, each spouse’s share is half of $200,000, meaning the buying spouse owes the selling spouse $100,000.
Is a Divorce Buyout of a House a Taxable Event?
Generally, no, not if the buyout is part of the divorce settlement. The IRS classifies transfers between divorcing spouses as tax-free.[1] There’s a caveat, though. The buying spouse inherits the original basis, which is based on what the couple paid for the home. This means when they sell later, they may owe capital gains on the full amount of the property’s appreciation (minus any exclusions that apply), as opposed to appreciation after the time of divorce.[2]
Business Buyout in a Divorce
A business buyout in a divorce works largely the same way a business buyout does. What gets a little more complicated is the valuation of the business.
Some states treat personal goodwill, a term that can encompass such intangibles as reputation and customer relationships, as marital property subject to division. Others don’t. While there are multiple ways to value a business in a buyout, in the case of divorce, it’s strongly recommended that a third-party appraiser determine the value of the business.
Pros and Cons of a Gradual Divorce Buyout
A gradual divorce buyout occurs when one spouse basically puts the other on a payment plan. Instead of paying up front, the buying spouse pays the selling spouse over an agreed-upon period of time.
The main advantage of this approach is that the buying spouse can avoid a lump-sum payment up front. The disadvantage is that the divorcing spouses will remain financially intertwined beyond the finalization of the divorce. In addition, if the buying spouse defaults on the mortgage, the other is still on the hook for payment, at least until the buying spouse refinances in their own name.
Divorce Buyout FAQ
Can I refinance to buy out my spouse?
Yes, this is a common means of financing a home buyout in a divorce. The buying spouse can refinance, assuming full control of the mortgage, assuming their income and credit are sufficient to do this.
What’s a HELOC divorce buyout, and how does it work?
In a divorce buyout, the buying spouse may take out a home equity line of credit (HELOC) to finance the payment. A HELOC does not replace the mortgage, so it can be easier to attain than a full refinance. The downside is that the interest rate varies depending on the market.
Do I need a buyout agreement if I already have a divorce settlement?
It’s strongly recommended. Usually, a divorce settlement (also known as a marital settlement agreement) will indicate that a buyout or buyouts will occur as part of the divorce. The buyout agreement is more specific about the terms and conditions of each buyout.