Should You Sell the House Before or After the Divorce Is Final in New Jersey?

There's no single right answer: whether to sell before or after the divorce is final depends on taxes, on who can carry the house in the meantime, and on whether the two of you can agree on the sale. Make the call with your attorneys and your tax professional, with real numbers for both paths side by side.

I'm Dennis Mark Interdonato with The Dennis Mark Group. The timing is a decision for you and your attorneys. What I bring as a Master CDRE® is a current market value and a realistic timeline for a sale, so you're comparing two real plans instead of two guesses.

What changes on taxes depending on when you sell?

A few federal rules drive most of it (IRS Publication 523 and IRS Publication 504):

• The exclusion amounts. An owner who meets the ownership and use tests can exclude up to $250,000 of gain on a main home. A married couple filing jointly can exclude up to $500,000 when both spouses meet the use test and at least one meets the ownership test.
• Your filing status follows December 31. If your divorce is final by the last day of the year, you're considered unmarried for that whole year, so you can't file a joint return for the year of the sale.
• The two-out-of-five-year clock keeps running. Ownership and use are measured over the five years before the sale. If one of you moved out a while ago, the clock matters.
• There's a divorce rule for the spouse who moved out. An owner can still treat the home as their residence while a spouse or former spouse is allowed to live there under a divorce or separation instrument and uses it as a main home.

New Jersey follows the federal guidelines for the principal residence exclusion (NJ Division of Taxation). How these rules land on your numbers is a question for your tax professional, before anything is signed.

Why do some couples sell before the divorce is final?

• The carrying costs stop. The mortgage, property taxes, insurance and upkeep on a shared house end at closing.
• The equity turns into cash. A known number is easier to divide than a house. The New Jersey Supreme Court has said that in many cases, proceeds from a sale before final distribution should be held in escrow until that distribution, and that in other cases they may properly be used to pay marital obligations (Randazzo v. Randazzo, 2005).
• The tax timing fits. For some couples, a sale in a year they can still file jointly works better. Your tax professional tells you whether you're one of them.
• Neither of you can keep it alone. If nobody can refinance, a sale is coming either way.
• The house stops being the fight. For a lot of couples, the house is the hardest thing to talk about. Once it's sold, the negotiation can move on to everything else.

A sale before the judgment needs both of you on board, or a court order. In the same 2005 decision, the Court held that a trial court has the equitable power to order a sale of marital property before a final judgment of divorce when the circumstances justify it.

Why do some couples wait until after?

• A signed agreement sets the rules. Price, timing and how the money is divided are settled before the house goes up, which can mean fewer arguments mid-sale.
• One of you wants to keep it. If a buyout is on the table, a sale may never happen. Read how a spouse buyout works in New Jersey. A deed between former spouses recorded within 90 days after the divorce decree is exempt from New Jersey's realty transfer fee (NJ Division of Taxation).
• Someone needs time to land. Some agreements let one spouse stay in the home for a set period before it sells.
• Something in the case has to come first. If a ruling on the house is pending, or an order in your case touches it, the order sets the timing, not anyone's sense of urgency. Your attorney tells you where you stand.
• You can't agree yet. A house two owners are fighting over is hard to sell well. New Jersey's settlement steps, the Early Settlement Panel and economic mediation, come first (NJ Courts).

How long might "after the divorce" be?

New Jersey's courts say a contested divorce can take several months or longer, and an uncontested one can be finished in much less time (NJ Courts). Monmouth County cases run through the Family Part in Freehold, and Ocean County cases through the Family Division in Toms River. Every month you wait, somebody is paying the mortgage, the property taxes and the upkeep. Put that cost next to the tax math.

Does the market care when your divorce is final?

No. Buyers see a house, a price and a condition. What they do care about is whether the sellers can deliver: a clear answer on who signs, organized communication and dates that hold. That's true on either side of the judgment. What matters next is the launch. The first two weeks on the market set the price, so whichever path you pick, the house should go live ready, priced from real comparable sales, with marketing that never says why it's for sale. The full order of steps is in how to sell a house during a divorce, step by step.

What if one of you lives out of state by then?

New Jersey's GIT/REP rules apply at closing. Nonresident sellers generally make an estimated income tax payment at closing, figured as 2% of the sale price or 8.97% of the gain, unless an exemption applies. One of the listed exemptions is a nonresident claiming the principal residence exclusion (NJ Division of Taxation). Raise it with your attorney early so the closing isn't held up.

What does a good timing decision look like?

I tell people what they need to hear, not what they want to hear. A good decision here has three numbers on the table: what the house would net if it sold now, what it costs every month to hold it until the judgment, and what your tax professional says each path means for you. If keeping it is in play, add a fourth: whether the spouse keeping it can get the other off the loan. Read how to get your name off the mortgage after a divorce. Start the first number with a home value request.

Frequently Asked Questions

Can we sell the house before the divorce is final if we both agree?

Yes. With both owners on board, your attorneys set the terms in writing and tell the closing agent how the proceeds are to be paid out or held.

What happens to the money if we sell before the divorce is final?

It's paid out or held the way your agreement or a court order says. The New Jersey Supreme Court has said that in many cases, proceeds from a sale before final distribution should be held in escrow until that distribution (Randazzo v. Randazzo, 2005).

Will selling before the divorce is final affect our settlement?

It can change what's on the table. Once the house is sold, you're dividing a known amount of money instead of a house and an estimate of its value. How that plays into your settlement is a question for your attorneys, so talk to them before you list.

Do we lose the $500,000 exclusion if the divorce is final first?

If your divorce is final by December 31, you can't file jointly for that year, so the $500,000 joint amount isn't available. Each owner who meets the tests can generally exclude up to $250,000 of their own gain. Your tax professional runs the numbers.

Does the spouse who moved out still get the exclusion?

Possibly. IRS Publication 523 lets an owner treat the home as a residence while a spouse or former spouse is allowed to live there under a divorce or separation instrument and uses it as a main home. Your tax professional applies it to you.

This is general information, not legal, tax or lending advice. Your attorney, mediator, tax professional or lender has the final word on your own situation.

About the author

Dennis Mark Interdonato is a REALTOR® and Master CDRE® who leads The Dennis Mark Group at Keller Williams Realty Ocean Living in Point Pleasant, NJ, helping buyers and sellers throughout New Jersey make their next move, with Monmouth and Ocean County as home base. He's a former New Jersey home builder and residential remodeler. See how he handles home sales during a divorce.

Keep reading

• The Divorce Guide
• See what your home could net today
• How a spouse buyout works in New Jersey
• Have a question this didn't answer? Send it to Dennis Mark.