Divorce can bring about some profound impacts on many aspects of your life, from living arrangements to financial and legal issues that need to be sorted out.
Divorce also can reshape the way married couples own title to real estate holdings. Couples typically own real estate as either tenants in common or as joint tenants, and the ownership structure can be impacted depending on your state’s property ownership and divorce laws.
Below we’ve outlined what you need to know about how divorce can change tenants in common ownership.
How Divorce Impacts Tenant in Common Ownership
Couples who buy or acquire real property during a marriage can hold title in several different ways, and each has key legal implications for life-changing events such as divorce or death. As noted above, the two most common ways married couples hold title to homes, condominiums, or townhomes are as tenants in common or joint tenants. A handful of states, however, have community property laws.
In a tenant in common arrangement, each spouse can hold unequal interests in the asset, which is different from joint tenancy ownership where interests are split down the middle. Tenants in common also are free to divest their interests however they want, or will them to a beneficiary of their choosing. In a joint tenancy, any change to ownership arrangements must be mutually agreed upon by both parties. Joint tenancy ownership interests also are passed on to the remaining tenant upon the death of one owner.
In a friendly divorce, couples agree to divide marital assets, including real estate. One co-tenant might transfer title to the other and receive adequate compensation for his or her share of the property. If division of assets is contested, however, one co-tenant can request a partition action through a lawsuit that asks their local court to either equally divide the asset or even sell it if a split proves troublesome. This process may also happen if one co-tenant cannot afford to buy out the other. A partition could be beneficial because it allows one spouse to move out of the house without relinquishing their ownership rights to the asset. This arrangement can be mutually satisfactory to divorced couples with children who want to ensure their kids have stability and continuity in their living situation.
Co-ownership through a tenant in common also can pose some potential drawbacks during a divorce. If both tenants are listed on the mortgage, then both parties are legally responsible for paying the mortgage regardless of their living situation. A co-tenant may want to change his or her living arrangements, but they’ll still have the debt load from the house or other asset showing up on their credit report. This could make it hard for them to qualify for a mortgage for another house.
Additionally, divorced couples have just one year from the cessation of their marriage to transfer real property from one co-tenant to another without incurring any tax liabilities. IRS 1041 was created to help simplify the transfer of assets between divorcing couples. One co-tenant could be hit with a significant tax liability if the asset is disposed of after this window closes. However, language in 1041 also states that transfers between co-tenants will still be tax-free if it is related to the cessation of marriage within six year’s time of the divorce date.
A bankruptcy filed by one party also poses significant financial turmoil to a former co-tenant if he or she is still listed on the title. Co-tenants should fully weigh the impacts of any reduced income for one spouse before agreeing to a partition or other co-titled arrangement.
Co-tenants who split can file a quitclaim deed to transfer ownership rights and legally remove their name from the property’s deed, which effectively ends their ownership interests.
The Bottom Line
Divorce brings significant changes to couples’ financial and legal arrangements. The way divorce impacts real property ownership depends on the way your state views property ownership between married couples. Consulting with legal and tax professionals about how divorce can change a tenancy in common agreement between you and your spouse may alleviate potential financial and legal problems after the split.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
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