What is Equity in a Divorce and How to Divide It Fairly
- What is equity? Why does it matter in divorce?
- The marital home and your marital equity
- How to divide equity fairly
One of the most critical aspects to consider during a divorce is how equity will be divided. Understanding what equity is – and how it impacts the distribution of assets – is critical to your success in this process.
What is equity? Why does it matter in divorce?
Equity refers to the difference between the current market value of an asset (such as a piece of real estate or a business) and any outstanding debts or liabilities associated with that asset. In simpler terms, equity is the portion of the asset's value that you actually "own" after subtracting any loans or mortgages.
How much equity do you have? Equity matters in divorce because it represents the true value of an asset, which must be divided between the spouses as part of the marital settlement agreement.
The division of property is often a contentious issue in divorce cases. Both parties may feel entitled to a larger share of the marital assets. Accurately determining the equity in shared assets is crucial to a fair and equitable distribution of property.
Read more about divorce settlements in our article, 12 Things People Forget to Include in their Settlement Agreements.
The marital home and your marital equity
To establish the value of home equity shared in a marital home, you'll need to determine the current market value of the property and subtract any outstanding mortgage balance or other debts associated with it. You might hire a professional home appraiser to accurately assess the home's value, while financial statements and loan documents can help you calculate the remaining debts.
For other investments, such as stocks, bonds, or retirement accounts, you'll need to determine their current value by reviewing account statements and, if necessary, consulting with financial advisors. Keep in mind that some investments may have tax implications or penalties when divided. It's essential to understand these factors before making any decisions.
Suggested: How to Work with a Certified Divorce Financial Analyst
How to divide equity fairly
There are several options for dividing a couple's equity in a marital home and other investments during a divorce. Each option has pros and cons, and the best choice depends on your circumstances and priorities.
One way to divide equity is by splitting the assets themselves.
For example, each spouse could receive a portion of the investment portfolio or retirement accounts. This method requires careful consideration of tax implications and potential penalties, as well as ensuring that the division is equitable based on factors like each spouse's financial contributions and future earning potential.
In a buyout, one spouse purchases the other's share of the equity in an asset, such as the marital home. This option allows one spouse to retain the asset while providing the other with a “cash out” in which they get their fair share of the value. Buyouts can be financed through personal savings, loans, or by refinancing the property.
Selling the home and splitting the proceeds
Property division could involve selling the marital home and dividing the proceeds as a means of dividing equity. This method can provide a clean break and a fresh start for both spouses, but it may require finding new living arrangements and could have tax consequences.
Refinancing the home
If one spouse wishes to keep the family home, they might consider refinancing the mortgage to remove the other spouse's name from the loan and adjust the mortgage terms. This option can help the remaining spouse afford the home on their own. However, it requires them to qualify with a lender for a new loan based on their individual income and credit. It’s also a good idea to have the home appraised beforehand so you know the precise value of the home.
In some cases, spouses may agree to delay the sale of the marital home until a later date, such as when the children reach a certain age or graduate from high school. This option allows the family to maintain stability during the transition but requires both spouses to cooperate and continue sharing financial responsibilities related to the home.
The value of your home may go up or down over time. Keep this in mind if you are considering a deferred sale.
Another option is for both spouses to continue co-owning the marital home, even after the divorce. This arrangement may work for couples who can maintain an amicable relationship and agree on shared responsibilities for the property. However, it may not be ideal for those who want a clean break from their ex-spouse.
If you're having trouble figuring out the equity of your marital home and how to divide it, Hello Divorce can help by giving you tools to help you calculate the equity.
Free download: What to Include in Your Settlement Agreement