How is Property Divided in a Divorce?

If you are divorcing or considering divorce, you probably wonder what will happen to all of the “stuff” you and your spouse own. There is no one-size-fits-all formula for determining how to divide property in every divorce. However, some general principles apply that to the decisions that you, your spouse, and the court will make regarding your property during your divorce case.

Know Your State’s Rules

Before you and your spouse begin thinking about or discussing how you would like to divide your property, you must understand the rules your state has in place regarding property division in divorce cases.

States approach property distribution in two ways. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin use “community property” as the basis for how property gets divided in divorce cases, while the other 41 states adhere to the “equitable distribution” standard.

Equitable Distribution States

Most states use equitable distribution as the basis by which divorcing couples and courts divide property in divorce cases. The court will create or approve only property divisions that are “fair and equitable.”

As you might imagine, this broad standard leaves much room for many different property division scenarios, which is good. You and your spouse will want to read your state’s property division rules to be sure that you understand precisely what your state considers fair and equitable. You can then explore ways to divide your property and your debts accordingly.

Many states’ definitions of fair and equitable consider several factors, including primary considerations like how long a couple has been married, each spouse’s mental and physical health, and each spouse’s current income.

Other, more subjective things may also be considered, such as the standard of living that a couple or family has established during their marriage; the contributions that each spouse has made to the other (both financially and otherwise) to increase their earning power; and each spouse’s projected future earning power.

While you’ll a lawyer to at least review your divorce agreement, if you and your spouse believe that a property division you are proposing is fair and equitable, you are, at the very least, moving in the right direction.

Community Property States

Only nine of the fifty U.S. states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – divide property in divorce cases on a community property basis. 

In community property states, each spouse owns half of the property categorized as “marital assets.” Each spouse also owns any property they can prove is “separate property.” 

Community property states have laws determining which assets are marital assets or separate property. Usually, those rules will state that everything a couple acquires during a marriage is marital property. Conversely, community property rules typically define separate property as any property that you or your spouse acquired before the marriage, through inheritance, as a gift explicitly given to one spouse, or received by one spouse as a payment for a personal injury.

The distinction between marital and separate property may seem straightforward, and it often is. However, there is a gray area that you and your spouse may need to consider when dividing your property. Many states acknowledge that sometimes, property that one spouse could claim is “separate” was commingled, or mixed in, with a couple’s marital assets to such a degree that it does not make sense to consider it “separate,” or it would not be fair to do so. For example, if one spouse inherits money and then deposits it into a joint account that both spouses own, a court may say that the inheritance money is no longer that spouse’s separate property.

As you and your spouse decide how to divide your property, check with a lawyer to understand the types of property considered marital property and separate property, as well as any rules regarding commingled property. That way, you can know whether the court will likely approve any property division you propose.

While most of your focus is likely on dividing property, remember that debts are also considered property in a divorce case. The same rules are likely to apply to debt as to other types of property in community property states, with debts acquired during the marriage falling into the category of marital assets and debts incurred before the marriage falling into the category of separate property.

As with any general principle, there are certain debts that some states may consider separate property even if they were incurred during the marriage, such as student loans that were taken out to finance one spouse’s education or debts created by one spouse’s gambling addiction. Try consulting with an attorney regarding the division of debts in divorce before talking with your spouse.

Deciding How to Divide Your Property 

Once you understand the rules for property division in your state, you and your spouse have a few choices about moving forward with dividing your property. For example, you can work with your spouse to come to an agreement about all of the types of property you own. If there are some types of property that you can agree on, but you find there are some that you either disagree about or need help understanding, you can get help from an attorney or a mediator. 

As a last resort, if you and your spouse cannot agree on how to divide any of your assets, you can hand the entirety of the property distribution portion of your divorce case over to the court for the judge to decide. 

Before you decide which of the options mentioned above is best for you, consider that most divorcing couples go through the work of reaching an agreement on property division before going to court. One possible reason for this is that the costs of disagreement can add up quickly, leaving each spouse with less after all is said and done. Even couples who disagree about many things can often work through those differences when they realize that they can avoid paying others, such as attorneys and appraisers, to help them reach an agreement.

Couples who have worked out their own property agreement often report higher satisfaction with the outcome of the property distribution in their divorce cases than those who let the court decide how to divide their property.

Full Disclosure Rules

There is one general principle that applies to divorcing couples in every state. Each spouse must be completely honest in reporting all of the property they are aware of as being owned by themself, their spouse, or both parties. This requirement of complete honesty is often called “full disclosure.” It applies to both parties’ behavior before and during divorce proceedings concerning their property.

For that reason, it is best not to spend, sell, or do anything else with any property that may be subject to division in your divorce without your spouse knowing about and agreeing to it. You can use resources that belong to both of you to purchase necessary things like groceries, or to pay your bills. Most states contain provisions in their laws that specifically protect and permit divorcing spouses’ abilities to do those things while prohibiting the waste, destruction, concealment, or other unlawful use of property.

How Do You “Divide” a House in Divorce?

The importance and value of a couple’s home are just two factors that make it a challenging asset to divide. When you add in each of your emotions towards the house – as well as the needs and feelings of your children if you have any – you may wonder how any couple could agree about what to do with their home in a divorce case. Fortunately, even in situations that require an even distribution of assets, there are various ways to approach the issue of dividing your home in your divorce.

Before you and your spouse discuss how to include your home in the property settlement for your divorce, you should carefully consider whether you genuinely want to keep the home and why. You’ll also want to consider whether and how you would afford to keep the home if you are awarded it. 

You may be surprised at what you discover when thinking about keeping a house. For example, the costs of home ownership go far beyond your monthly mortgage payment and utility bills. Homes require regular maintenance and upkeep to serve their purpose as a safe and comfortable dwelling place. Home repair projects, even minor ones, often require professional assistance and can be costly. If you want to keep your home as part of the property division in your divorce case, plan for all the expenses and how you will meet them in the future.

Some ways that divorcing couples choose to include their homes as part of the property division in their divorce cases include:

• one spouse buying out or refinancing the other spouse’s interest in the home
• mutually selling the home and splitting the proceeds
• remaining as co-owners of the house (either the spouses are comfortable with remaining co-owners of the home while only one spouse lives there, or they remain co-owners but neither lives in the home and they rent it out). 
• deferring the sale of the home to another time such as when the children are grown and then selling it.

You and your spouse may find that one of these possibilities will work for you, or you may decide to do something different. As long as what you and your spouse decide to do with your marital home fits within the requirements of your state’s laws, you can get as creative as you would like to in finding a way to divide your home that will benefit both of you.

Is it Possible for One Spouse to Receive Reimbursement for Any Improvements Made to the Other’s Property?

The answer to this question depends on the specific situation and state law. Generally, money spent on a spouse’s property without their consent may not be reimbursed. However, there are certain exceptions. For example, reimbursement may be possible if the improvement is necessary for safety or health reasons and gets approval from both spouses.

Additionally, if the improvement is from a loan that both spouses are jointly liable for, then the spouse who made the modifications may be able to seek reimbursement for their costs. Ultimately, the laws governing refunds for improvements made to property owned by a spouse vary between states, and it’s advisable to review them before taking any action.

Tips for Dividing Debts

When you and your spouse decide who will be responsible for which debts, you must remember that the law does not require your creditors to abide by any repayment agreement between the two of you. Even if you and your spouse decide to split responsibility for the payment of a debt, the creditor might require full repayment from one of you. If this happens, one spouse can pay off the debt to satisfy the creditor, and the other can repay them the amount they agreed to pay. 

Some couples find that it is to their mutual advantage to agree to pay off as many of their debts as possible during their divorce as part of their property division agreement. This may not seem appealing because it gives each spouse less to start over with. However, it does prevent both spouses from having to keep paying off debts from their marriage long after they are divorced.

Your Options for Dividing Retirement Benefits

As a financial asset, retirement savings are subject to division in divorce cases. There are two ways to divide retirement savings in divorce cases. The method that you will need to follow to divide your and your spouse’s retirement accounts depends upon whether each account is an IRA or another type of account, like a 401(k) or 403(b). 

IRAs are divided through a process called “transfer incident to divorce.” Other retirement accounts are divided using a Qualified Domestic Relations Order (QDRO).

Deciding what to do about your and your spouse’s retirement savings as part of your property division agreement is one thing. Putting whatever you agreed to into action will require some paperwork and, in some cases, the assistance of an attorney. Both transfers incident to divorce and QDROs are complex documents best completed by a financial professional or an attorney, so that you and your spouse will retain all of the value of your retirement accounts. Unfortunately, you or your spouse may pay taxes or penalties if the transfers are done incorrectly.

Help is Available If You Need It

While you and your spouse may do the bulk of the work of deciding how to divide your property, it is a good idea for you to have a divorce lawyer review the property distribution agreement that you plan to present to the court. Having a lawyer review your drafted agreements can help you and your spouse know whether the agreement that you are making is fair and whether it complies with all of your state’s property distribution rules. 

You may also wish to have an attorney help you work through any parts of your property distribution that you either cannot agree on or need more information about before you try to reach an agreement. For example, a divorce attorney could help you understand your options for deciding what to do with complex assets like a home or a retirement plan. They could also help you negotiate with your spouse and their legal team if they have one.

Dividing property is just one part of a divorce. You and your spouse may need to reach an understanding about child custody and visitation, child support, alimony, or other matters. Divorcing couples can agree on those issues, just as they do with property division. It is also possible for couples to get help from an attorney with any parts of their divorce case that they either cannot agree on how to resolve or need help understanding.

An unbundled attorney can help you resolve your divorce without going to court. Lawyers who offer limited “unbundled” representation (in addition to full representation) are more affordable than attorneys who only sell a complete package of services. Unbundled family lawyers start at between $500 and $1,500, while others attorney tend to start at double to triple these costs.