Buying Out Your Spouse's Share of the House in BC: Steps, Mortgage and Tax

For many separating couples, one spouse wants to stay in the home, often for the children's sake. That is possible when the spouse who stays can pay the other their share and take over the mortgage.

This article walks through the steps of a buyout in BC: working out the number, putting the deal in writing, dealing with the lender, transferring title, and the property transfer tax and income tax points to check along the way.

What you are buying

Under section 81 of the Family Law Act, unless an agreement or order provides otherwise, each spouse has a right on separation to an undivided half interest in all family property as a tenant in common. A buyout replaces that half interest with a payment. The payment is usually based on the equity in the home, adjusted for everything else being divided.

If one of you brought the home or a down payment into the relationship, or used a gift or inheritance, part of the value may be excluded property. Our articles on dividing family property in BC and the family home after separation explain those rules and the options other than a buyout.

Step 1: value the home and work out the equity

Section 87 says family property is valued at fair market value as of the date of the agreement dividing it, or the date of the court hearing, unless an agreement or order provides otherwise. Values change, so get a current appraisal close to the date you sign.

Example (illustration only): a home appraised at $1,400,000 with a $600,000 mortgage has $800,000 of equity. Half is $400,000. That figure is then adjusted for any excluded property, the other assets and debts being divided, and any agreed costs.

Step 2: put the deal in a written agreement

Section 92 lets spouses make agreements about dividing property and debt, equally or unequally. A written agreement with each spouse's signature witnessed is harder to set aside later: section 93 limits when a court can do so. A buyout agreement should usually cover:

• the price and the valuation date it is based on;
• a deadline for the staying spouse to arrange financing, and what happens if financing fails, such as a sale;
• who pays the mortgage, property taxes, insurance and repairs until completion;
• the transfer of title, the release of the departing spouse from the mortgage, and an indemnity if that release is delayed;
• how the buyout fits with the rest of the property division and any support.

Mind the deadline. Under section 198, a claim to divide property must generally be started within two years after a divorce order for married spouses, or within two years after separation for unmarried spouses.

Step 3: deal with the lender

Your agreement binds the two of you, not the bank. Section 82 of the Family Law Act confirms that the property-division rules do not affect the rights of a spouse's creditors in relation to family debt. If both names are on the mortgage, both remain liable until the lender releases one of you or the mortgage is paid out.

Most buyouts are funded by a refinance: the staying spouse qualifies for a new mortgage in their own name, which pays out the existing mortgage and provides the buyout payment. Get pre-approval before you sign, and check any prepayment charge on the existing mortgage.

Step 4: transfer title and property transfer tax

The departing spouse signs a transfer of their interest, which is registered at the Land Title Office. Under the Land Title Act, section 42, the transferor's signature must be witnessed by an officer, such as a lawyer or notary, who is not a party. The refinance and the transfer are usually completed together by the lawyer acting on the mortgage.

Property transfer tax normally applies to a transfer of land, but section 14(3)(h) of the Property Transfer Tax Act exempts a transfer to a spouse or former spouse made under a written separation agreement or a court order under the Family Law Act. Two details matter. For section 14, "spouse" means a spouse who is a Canadian citizen or permanent resident. And the Act's general definition of spouse covers married spouses and those in a marriage-like relationship for at least two years. Our article on family property transfers and PTT exemptions covers the other family exemptions.

Step 5: check the income tax points

Income tax is often overlooked. The Canada Revenue Agency's folio on the principal residence (S1-F3-C2) explains several points that can affect a buyout:

• One designation per family unit. For each year, only one property per family unit can be designated as a principal residence. A spouse who is living apart under a separation may fall outside the family unit, which matters if each of you now owns a home.
• Transfers to a former spouse. Where the transfer qualifies for the spousal rollover in subsection 73(1) of the Income Tax Act, the receiving spouse is generally treated as having owned the home throughout the period the transferring spouse owned it, and as having it as a principal residence for the years it was the transferor's.
• Reporting. Since 2016, a sale or other disposition of a principal residence must be reported on the tax return, with Form T2091(IND) for individuals.

If either of you owned another property, rented part of the home, or used it for business, get tax advice before you sign.

Planning to keep the house? Get the order of steps right

Our family lawyers can negotiate and prepare the buyout agreement and coordinate with the lender and the conveyancing so the transfer, refinance and payment complete together.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.