Undecided about marital home - time frame, tax implications

Just starting a separation agreement. We are unsure of what will ultimately happen with the house. We have yet to decide if either of us will buy each other out, or sell.
In any case - one or both of us will get cash for 1/2 the equity or sale.
Is there a time limit of when this can be decided/executed to be able to still be considered non-taxable because it is a result of a divorce, does it have to be done prior to finalization of the divorce?
Can a 401K be used to pay for 1/2 the equity?

There is no time limit but you should include a deadline in the final agreement to either place on the market for sale or for one party to buyout the other so that you do not sit on this issue indefinitely and so it can eventually be resolved at some point.

A typical deadline would be 90-180 days after the date of execution of the separation agreement, but it can be as long as you each agreement. Even 12-18+ months, although the longer the time period, the riskier it gets financially because you don’t know what the real estate market will do.

You could use 401(k) funds to pay half the equity but this is most likely not the wisest financial decision. You would have to pay taxes plus the 10% early withdrawal penalty or you would have to take a loan from your 401(k) and pay it back.

Most people pay the equity to the other party by a cashout refinance of the mortgage or by obtaining a HELOC.

Anna Ayscue

Attorney with Rosen Law Firm Cary • Chapel Hill • Durham • Raleigh • Wake Forest

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