People preparing for divorce often worry about how ending a marriage might affect their finances. For example, they worry about dividing their property and losing a large portion of their personal wealth. A significant amount of an individual’s personal wealth may come from the equity they have accrued in the home where they live.
Married couples often invest heavily in their homes and then worry about losing that equity if they divorce. Misinformation about community property rules can leave people preparing for divorce very worried about their home equity. Many people have heard the oversimplified explanation that the courts divide everything in half under community property laws.
What usually happens with home equity in a divorce?
A 50/50 split is not automatic
Contrary to what people often claim, community property rules do not always mean that couples have to split everything in half. Couples who negotiate their own settlements can establish their own agreements based on their economic circumstances and the factors contributing to the divorce.
Those who settle outside of court might agree that one spouse keeps all the home equity while the other keeps the small family business, for example. Even in cases where family law judges have to settle property division matters, an even split of equity is not necessarily the automatic outcome. Instead, a judge begins with a presumption that each spouse deserves an equal share of the marital estate as a whole.
They can use certain assets or marital debts to balance out other property in their property division orders. They can award each spouse half of the equity, but that isn’t necessarily the most appropriate or fair solution.
One spouse could keep the home and a significant portion of the equity in return for accepting significant marital debts and the other spouse retaining other valuable assets. The actual outcome can be drastically different from one case to the next based on factors including the length of the marriage and the contributions each spouse made to the household.
Reviewing financial circumstances with a skilled legal team, and setting clear priorities, can help those preparing to discuss property division matters in an upcoming divorce. Although spouses often have to share home equity, or at least consider its value, actually refinancing and withdrawing half of a home’s equity isn’t always necessary.