Buying out your spouse's share of the house: how it works in Canada and the US

For many people the house is not just an asset. It is where the children sleep, the school down the road, the neighbours who know them. Wanting to keep it is completely understandable. Wanting to keep it can also lead people to agree to numbers they cannot sustain, so it is worth going through this calmly, with real figures, before you commit.

A buyout works much the same way in Canada and the US. What differs is the lending rules, the transfer taxes and the paperwork. This guide covers both, and flags where they part ways.

Step one: what is the house worth?

Everything else depends on the value, so get it right.

• Use a professional appraisal, not an online estimate or a real estate agent's listing opinion. An appraiser's report is what a lender will rely on, and a lender will often order its own anyway.
• Agree on the appraiser together, or each get one and settle on the midpoint. A jointly chosen appraiser costs less and causes fewer arguments.
• Agree on the date. House prices move. If months pass between the appraisal and the transfer, decide in writing whether you will update it.
• Deal with condition. If there are major repairs needed, get quotes. Some couples adjust the value for them; others don't. Decide explicitly.

Step two: calculate the equity

Equity is the value of the home minus everything secured against it: the mortgage, any home equity line of credit and any other liens. The departing spouse's share of that equity is what the buyout pays.

Illustrative example only. These numbers are made up to show the arithmetic. They are not typical prices or recommended terms.

Add the costs of the refinance itself (appraisal, legal or closing fees, and any penalty for breaking the existing mortgage) and the real figure is higher. Those costs can be paid from savings, added to the loan if the lender allows, or shared by agreement.

Three things often change the simple 50% figure:

• The wider property settlement. The house is rarely divided on its own. In Ontario, for example, the home's value goes into the overall equalization of net family property, and in US equitable distribution states the court looks at the whole marital estate. Your ex might take a bigger share of a retirement account instead of cash, which lowers or removes the buyout payment.
• Separate contributions. If one spouse put in pre-marriage money or an inheritance, the law in your province or state decides whether that is credited back. See our guides to property division in Canada and the matrimonial home.
• Notional selling costs. Some couples deduct what it would have cost to sell (agent commission, legal fees) because the keeping spouse avoids that cost now but may pay it later. Others don't. Neither is wrong; just agree on it explicitly.

Step three: can you qualify alone?

This is where most buyouts succeed or fail. The court or your agreement can say who keeps the house, but only a lender can decide whether you can carry the mortgage on your own income.

In Canada

• The stress test. Federally regulated lenders must check that you could afford your payments at a higher qualifying rate. For uninsured mortgages, OSFI sets this as the greater of 5.25% or your contract rate plus 2%. Insured mortgages are also stress tested. A buyout refinance in one name almost always means requalifying.
• The 80% limit. A standard refinance usually lets you borrow up to 80% of the home's value. In the example above, 75% fits. If the buyout pushes you above 80%, a standard refinance will not work.
• Spousal buyout mortgages. Some lenders offer specific spousal buyout products that can allow higher borrowing than a standard refinance, with mortgage default insurance. Terms, limits and availability change, so ask a mortgage broker or your lender what is available now. Expect to need a signed separation agreement and an appraisal.
• Prepayment penalties. Breaking a fixed-rate mortgage before the end of its term usually means a penalty, sometimes a large one. Ask your current lender for the exact figure in writing, and ask whether they will do the buyout themselves, which may reduce costs.
• Support income. Lenders may count child or spousal support you receive, but usually only when it is set out in a signed agreement or order.

In the US

• Refinancing. Lenders will look at your income, debts and credit on your own. Under Fannie Mae's rules, a refinance used to buy out a co-owner's interest because of a divorce can be treated as a limited cash-out refinance, rather than a cash-out refinance, if the home was jointly owned for at least 12 months and there is a written agreement. That classification can affect pricing and how much you can borrow, so ask your lender how they will treat it.
• Keeping the existing loan. Federal law generally stops a lender from calling a residential loan due just because ownership passes to a spouse under a divorce decree or separation agreement. That means the keeping spouse can often take title and keep making payments on the existing loan, but the departing spouse stays legally liable unless the lender agrees to release them. Some government-backed loans can be formally assumed with lender approval, which can release the other borrower.
• Support income. As in Canada, lenders typically want documentation of support you receive before counting it.

If you can't qualify, it is better to know now than after you've given up something else in exchange for the house. FairWell's post-separation mortgage help can connect you with someone to run the numbers.

Step four: title, transfer and taxes

Timing is everything. The departing spouse should not sign over their ownership until they are released from the mortgage, either because the loan is refinanced into the other spouse's name or the lender has formally released them. Otherwise they can end up owning nothing while still owing the debt. The cleanest approach is for the refinance, the payment of the buyout and the transfer of title to close on the same day, handled by a lawyer, notary or title company.

US: quitclaim deeds. A quitclaim deed transfers whatever ownership interest you have, and nothing more. It does not remove your name from the mortgage. Sign it at closing, as part of the refinance, not before.

Canada: land transfer tax. Several provinces exempt transfers between spouses at separation. In Ontario, a transfer between spouses or former spouses is exempt from land transfer tax when it is made under a written separation agreement or a court order, or when the only payment is assuming the mortgage. In British Columbia, a transfer to a spouse or former spouse under a written separation agreement or a court order under the Family Law Act is exempt from property transfer tax, and a copy of the agreement or order must be filed. Rules and paperwork differ by province, and some cities charge their own tax, so ask your lawyer or notary to confirm.

US: transfer taxes. Many states and counties have transfer or recording taxes, and many exempt transfers between spouses as part of a divorce. Your title company or closing attorney can confirm.

Income tax in the US. A transfer of property between spouses, or to a former spouse incident to divorce, is generally not taxable. The spouse who keeps the house takes over the original tax basis. When the home is later sold, up to $250,000 of gain may be excluded for a single filer who meets the IRS ownership and use tests, and you can count the time your former spouse owned the home toward the ownership test.

Income tax in Canada. Transfers between spouses or former spouses to settle property rights after a breakdown generally happen at cost, so no tax is triggered at the time of transfer. If the house was your principal residence for every year you owned it, gains are usually sheltered by the principal residence exemption. If it was a rental, or you also own a cottage, get tax advice. Our guide to separation and taxes in Canada has more.

Before you commit

Ask yourself honestly whether keeping the house is the right decision, not just the comforting one:

• Can you afford the mortgage, property tax, insurance and repairs on one income, with some savings left for emergencies?
• Are you giving up retirement savings to keep it? A house you can't maintain is not security.
• Would the children be just as settled in a smaller place nearby, in the same school?
• What happens to any other joint debts? Read our guide to joint debt.

What to do this week

1. Get your current mortgage statement and ask your lender in writing for the payout figure and any penalty for breaking the mortgage.
2. Talk to a mortgage broker or lender about whether you could qualify alone and at what amount, before you negotiate.
3. Agree on an appraiser with your spouse, or propose two names.
4. Build a one-income budget for the house including taxes, insurance, utilities and maintenance.
5. Put the plan in writing. Your separation agreement or settlement should set the value, the buyout amount, the deadline for refinancing, and what happens if refinancing fails (usually a sale).
6. Have a lawyer review it before anyone signs a transfer, quitclaim or new mortgage. Our mortgage after separation guide explains the other options if a buyout does not work.

Common questions

How do you calculate a spousal buyout?

Start with the appraised value of the home, subtract the mortgage and any other debts secured on it to get the equity, then calculate the departing spouse's share of that equity. The final figure is often adjusted by the wider property settlement, separate contributions and any agreed deduction for notional selling costs.

Can I keep the house if I can't qualify for the mortgage on my own?

Usually not by refinancing. If you can't qualify on your own income, options include a co-signer, a spousal buyout mortgage product where available, keeping the existing loan for a defined period with clear written terms, or selling. Each has risks, so get advice before choosing.

Should I sign a quitclaim deed before the refinance closes?

No. A quitclaim deed gives up your ownership but does not remove you from the mortgage. Sign it at closing, when the refinance pays off the joint loan and releases you.

Do I pay land transfer tax when buying out my spouse in Canada?

Often not. Ontario and British Columbia, for example, exempt transfers between spouses or former spouses made under a written separation agreement or court order. Rules and required documents vary by province and some cities charge their own tax, so confirm with your lawyer or notary.

Is a buyout payment taxable in the US?

Generally no. Transfers of property between spouses, or to a former spouse incident to divorce, are not taxable under federal law. The spouse who keeps the home takes over the original tax basis, which matters when it is eventually sold.

Official sources

• Minimum qualifying rate for uninsured mortgages (Office of the Superintendent of Financial Institutions)
• Transfers of land between spouses (Government of Ontario)
• Property transfer tax exemption codes (Government of British Columbia)
• Publication 504, Divorced or Separated Individuals (IRS)
• Publication 523, Selling Your Home (IRS)

This guide is legal information, not legal advice, and it is written for a general audience across Canada and the United States. Family law is provincial and state-based and changes over time. Before you rely on anything here for your own situation, confirm it with a qualified family lawyer in your province or state. FairWell can connect you with one through the professional directory.