A note is hard to split in a divorce. One spouse may want cash now. The other may not want to wait 15 years for monthly checks. And nobody wants to keep sharing a payer after the divorce is final.
Selling the note, or part of it, can turn it into cash you can split cleanly.
Short version: You have three main choices: one spouse keeps the note, you sell it and split the cash, or you sell part and split the rest. Whatever you choose, get it in the divorce decree, and make sure the right people sign.
I'm not a lawyer or a tax advisor. Work with your divorce attorney and CPA on the settlement. Here's how the note side works.
Your three options
1. One spouse keeps the note. The other spouse gets other assets of equal value. This works if one of you wants the income and the other wants something else, like the house or a retirement account.
The hard part is agreeing on the value. A note's balance isn't its cash value. Read how much is my mortgage note worth.
2. Sell the note and split the cash. This is the cleanest split. You both walk away with cash, and neither of you has to deal with the payer again.
3. Sell part of the note. A partial sale sells only the next few years of payments. You split that cash now. The rest of the note comes back later to whoever the decree says.
Getting a real value for the settlement
Attorneys and mediators often ask, "What's the note worth?" The balance is the wrong answer. A note with a $60,000 balance might be worth $45,000 to $50,000 in cash.
A written offer from a note buyer gives both sides a real number to work from. I can give you a quote for the whole note and a partial, at no cost.
Who has to sign
This is where divorces get stuck. Check who's named on the note and the mortgage or land contract.
- If both spouses are named, both usually need to sign the sale papers. Or the divorce decree can award the note to one spouse, who then signs alone.
- If only one spouse is named, that spouse signs. The other may still have a claim in the divorce, so the decree needs to address it.
- If the note is in a trust or an LLC, the trustee or manager signs.
The title company or closing attorney will want a copy of the final decree, or a signed agreement from both spouses. Get the note addressed clearly in the decree. It saves weeks.
Timing: before or after the divorce is final?
Selling before it's final gives you cash to split right away. Both spouses agree and both usually sign.
Selling after it's final means one spouse owns the note by the decree and sells it alone. This is often simpler if you can't agree on much.
Either way works. Talk with your attorney about which fits your case.
Taxes
Moving a note from one spouse to the other as part of a divorce usually isn't a taxable event under federal rules. But the gain that was deferred when the property was sold doesn't disappear. When the note is sold or paid off, someone pays tax on it.
Who that is depends on who owns the note when it's sold. Factor that into the split. Read taxes when you sell an owner-financed note and talk with your CPA.
What happens to the payer
Nothing changes for them. Same balance, rate, and payment. They get a letter telling them where to pay. Read what happens to the payer when you sell.
Frequently asked questions
Can we sell a mortgage note during a divorce?
Yes. Both spouses usually need to agree and sign. Or the divorce decree can award the note to one spouse, who then sells it.
How do we value a note in a divorce?
Use a written cash offer from a note buyer. The balance overstates what the note is worth in cash today.
Do both of us have to sign to sell the note?
Usually, if both of you are named on it. A final decree awarding it to one spouse can change that.
Can we sell just part of the note?
Yes. A partial sale gives you cash to split now. The rest of the note comes back later to whoever the decree says.
Will we owe taxes if we sell the note?
Possibly. The deferred gain from the original sale comes due. Talk with your CPA about who pays it.
Need a number for your settlement? Get a free quote, or have your attorney send the details.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.