How is Property Divided After Divorce?

How is Property Divided After Divorce?

Navigating a divorce is tricky—especially when a lot of property is involved. That’s why it’s vital to understand the rules behind the division of property after you and your spouse break up.

Here are the three main factors that govern property division after a divorce.

1. Type of divorce

Sometimes divorcing couples can work out the property division on their own. This is called an uncontested divorce. In an uncontested divorce, both spouses agree on how property should be split and there is no formal trial.

To effect an uncontested divorce, get together with your spouse to list your belongings, valuate them, decide who should be the owner of each, and then get your agreement approved by a judge (who usually approves unless the agreement appears patently unfair).

If you and your spouse don’t agree on how to split property, the divorce becomes a contested one. This means you’ll need to hire an experienced family law lawyer to represent you in court, and a judge will decide how your property will be divided. Although this route is long and costly, it may be your only option.

Alternatives to consider include mediation and arbitration, which allow you and your spouse to arrive at a property division agreement outside of court by hiring a private mediator or arbitrator.

2. Type of property

Assets generally fall into two categories: marital property and separate property. Marital property includes any assets acquired during the marriage (unless a prenuptial agreement specifies otherwise).

Even if the title of the property (e.g., for a house or car) is in the name of only one person, it still belongs to both spouses, which is something most people are not aware of. Marital property may include retirement funds (pensions, 401(k)s, and IRAs), stock options and brokerage accounts, annuities, life insurance, bank accounts, real estate, cars, boats, art, antiques, businesses, and more.

Separate property refers to anything that was acquired before the marriage. It also includes any inheritances or gifts addressed exclusively to you, and payments received for the pain and suffering portion of a personal injury judgment.

Keep in mind that if separate property is mixed with marital property, it could turn into marital property (for example, money earned before the marriage that contributed to the purchase of a house after the marriage).

Also, be aware that any value appreciation of separate property will still be considered exclusively yours—unless the appreciation occurs through active investment with the help of your spouse. So if your spouse helped to renovate your house, and the home value increased as a result, the appreciated value will be treated as marital property.

Finally, in some states, assets acquired after spouses separate are considered separate property even if the couple is still married. As you can see, distinguishing marital property from separate property can be tricky and get messy fairly fast, so it pays to know the rules.

3. The state you live in

Finally, laws on property division vary by state, but every state follows only one of two basic rules: equitable distribution or community property.

Most states adhere to equitable distribution, which means assets will be divided in a manner the judge deems fair, which is often but not necessarily 50/50. In deciding how to split assets, the judge may take many factors into account, including the following:

  • The debts and liabilities of each spouse
  • The age and health of each spouse
  • The income and income potential of each spouse (now and at the time of the marriage)
  • The length of the marriage
  • The needs of any children
  • Whether a spouse sacrificed a career to become a homemaker or caretaker
  • Tax implications for both spouses

Nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) are community property states, which means marital property is divided evenly (50/50), while separate property remains separate.

However, if property can’t be split evenly, one spouse may be required to pay the other the difference, in what’s called equalization payments. For example, it’s difficult to split the value of a house, so the judge may require the spouse who retains homeownership to pay the other individual a certain amount to make up for loss of ownership.

At other times, spouses may be required to sell the asset and split the proceeds, or opt for a deferred sale. For example, if children are involved or the real estate market is poor, a deferred sale may be a more optimal solution.

The bottom line

Determining how to divide assets after divorce is a challenge, to say the least. Now that you know the three main factors that govern asset division, you’re already a step ahead of the game.

To get the best resolution, consult a local family law attorney. He or she will be able to tell you exactly how the law works in your state and which property you might expect to keep.