Marriage is supposed to be forever, but it doesn't work out that way for every couple. If you and your spouse own a home together and you decide to part ways when the real estate market is at rock bottom, it can create a snag in your divorce proceedings. Both of you have a right to a share of the equity in the home, and both of you have a liability for the mortgage. If the value of your home and the mortgage balance are equal, there's no equity to divide, but you still have to address the home's value because it’s still a marital asset.
One of the first steps in the divorce process is to determine how much your home is worth. In some states, a real estate appraisal is mandatory. If you and your spouse can't reach a marital settlement agreement, the court must know exactly what the asset is worth before it can decide what to do with it. It's just as important to have an appraisal done if you're trying to negotiate a settlement. You can't give and take without a firm grasp on the numbers involved.
If the home has no equity at all, the simplest approach might be to simply sell it and walk away. The mortgage will be satisfied, so you won't have to deal with how to apportion that debt. Alternatively, one spouse can keep the home and refinance the mortgage into his name. This is something of a wash as far as property and debt division is concerned. He might be getting a $300,000 asset, but he's also taking on $300,000 in debt.
The real estate market fluctuates, so your home's value at the time of your divorce is probably not representative of what it might be worth five or 10 years later. If you don't sell the home and if one spouse retains it and assumes the mortgage, this involves rolling the dice to some extent. If you keep the home, you may receive a windfall if you sell 10 years later and the home has significantly increased in value. Any profit realized is immune from division with your spouse because it's post-divorce appreciation. By the same token, if the market plummets, you alone would be responsible for a mortgage balance that's more than the home is worth.
If your home is underwater – the mortgage balance is more than what the home is worth – this creates a whole new problem and complicates the situation. If the spouse retaining the home is able to refinance the mortgage into his name, he's taking on additional debt with no corresponding asset to balance it. The spouse who isn't retaining the home shares liability for the deficit. You can compensate for this by giving additional assets to the spouse who's assuming responsibility for the underwater mortgage, equal in value to half the deficit. Alternatively, the spouse not keeping the home can take on other debt equal to half the deficit. If you sell the home, both of you would be responsible for the shortfall owed to the lender.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.