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.
- Balance remaining on 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 a Taxable Event?
Generally, no. 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 calculated based on what the couple paid for the home. This means when they sell later, they may owe capital gains on the appreciation, as opposed to appreciation after 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, which includes such intangibles as reputation, as marital property. Others don’t. It’s strongly recommended that a third-party appraiser determine the value of the business.
Pros and Cons of a Gradual Buyout
A gradual divorce buyout occurs when one spouse 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. An advantage of this approach is that the buying spouse can avoid a lump-sum payment up front. A disadvantage is that the divorcing spouses will remain financially intertwined beyond the finalization of the divorce.
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, provided their income and credit are adequate.
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 obtain than a full refinance. The downside is that the interest rate will vary 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.