Featured News 2012 Co-Owning a Home with an Ex-Spouse

Co-Owning a Home with an Ex-Spouse

Divorce is a difficult decision, and brings on a plethora of tough choices. One of these is the fate of your home. While many spouses decide to sell their co-owned property in the event of the divorce, or one spouse will assume full ownership of the home, there are rare cases where the couple wants to split the cost and continue to co-own the property. In these cases, one spouse remains in the home (normally this is a mother with small children) and the other spouse moves out, but continues to assume half of the financial and legal responsibility for the property. This is a smart option if one spouse cannot afford to buy the other out, but wants to give children the security of remaining in their home. Sometimes, over a period of years, one spouse can save enough money to buy the other out.

Co-owning is normally feasible if the house deed states that the couple is "tenants in common." This means that they both own half the interest and property on the home, as declared on the housing deed. Both parties may sell their interest at will and without the consent of the other. When it comes to co-owning, there is much accounting involved. Couples must determine how they will split mortgage payments and other costs, such as upkeep and the mortgage interest deduction.

Prior to 1997, a tax law declared that "out-spouses" or an ex-spouse who co-owns a home but does not live there, would be disqualified from home sale tax benefits regardless of the situation. This strict occupancy policy discouraged ex-spouses from entering a co-owning relationship, because there was no profit for the non-resident spouse. The Tax Payer Relief Act of 1997 was able to reverse this so that if the "out-spouse" passes a "two-out-of-five-year" test, he or she can qualify for a portion of the tax-free home sale profits up to $250,000.

There is a loop-hole in this test, which allows a spouse who has not physically lived in a home to still qualify for all tax benefits. The former husband and wife may agree that the wife is permitted to occupy the home while the children are still minors. After they have grown and moved out of the house, then the home can be put up for sale or one spouse can buy the other's share for market value. In this arrangement, the ex-spouse who is living elsewhere can receive credit for the other spouse's continued use of the property. When the home is sold, the non-resident will still pass the "two-out-of-five-years" test, and be rewarded the due tax privileges.

Still, there are some other elements to consider before deciding on a co-ownership. First, your situation is different if you owned a home independent your spouse before you were married, and then decided to co-own during marriage. In the event that your marriage was brief, the spouse who formally owned the property may be given full ownership when you split. The longer a marriage progresses, the less likely that this will occur. Another important considering is tax liabilities.

According to URS Section 1041, transfers between spouses as a result of a divorce are not taxable. This rule applies to all transactions that take place within a year of the divorce becoming final, and has long as it is related to the end of your union. "Relating to the end of your union" is defined by the IRS as a written agreement that occurs within six years of your divorce. Any event after six years does not qualify for tax benefits. It is essential that you get a court-approved legal document outlining your co-ownership decision before you commit to a co-ownership. This can usually be an aspect of your divorce agreement, and will protect you from expensive tax obligations.

Think through the fate of your home if your ex-spouse passed away. You and your former partner must make wills to avoid any confusion. You may want to will your half of the home to your ex-spouse to eliminate the possibility of eviction in the event of a death. Take into account that one spouse could be sued by creditors or file for bankruptcy. In this case, the spouse's share of the home could be seized, which could result in a forced sale. If you believe that there is a possibility that your spouse could fall into these situations, you should avoid co-owning.

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