What Happens to Property in a Divorce: Sale, Extinction of Joint Ownership or Right of Use

The Marital Property Regime as a Starting Point

Before addressing the options for disposing of the property, it is essential to review any prenuptial or postnuptial agreements (capitulaciones matrimoniales) or the statutory matrimonial property regime applicable by default in the relevant autonomous community:

• Community of marital property (sociedad de gananciales): Assets acquired during the marriage using joint funds belong equally to both spouses. If the property was purchased after the marriage under this regime, it forms part of the joint marital assets and must be liquidated through the relevant procedure.
• Separation of property (separación de bienes): Each spouse retains sole ownership of assets acquired in their own name. If the house was purchased jointly (in proindiviso), ownership is shared according to the percentage contributed and stated in the public purchase deed.

Having a clear understanding of the existing ownership structure determines the legal procedure required to liquidate the marital community or extinguish the joint ownership (proindiviso) over the family home.

The Three Main Ways to Resolve Property Ownership

When a couple decides not to retain joint ownership of the property following a breakdown of the relationship, there are three primary mechanisms to achieve a legal and financial resolution for the home.

1. Sale of the Property to a Third Party

A direct sale on the open real estate market is often the clearest option from a financial perspective. It allows the outstanding mortgage to be redeemed in full and any remaining capital split according to each party's ownership share.

Carrying out this transaction requires the explicit agreement of both parties or judicial authorisation within the divorce proceedings. Establishing a realistic market valuation and having a commercial strategy are vital to prevent the sale from stalling due to disputes between joint owners.

2. Transfer of Ownership via Extinction of Joint Ownership (Extinción de Condominio)

If one spouse wishes to acquire sole ownership of the property, a conventional sale and purchase is not required. The appropriate legal instrument is the extinction of joint ownership (extinción de condominio) or dissolution of the joint property arrangement.

In this procedure, one spouse transfers their ownership share to the other in exchange for financial compensation equal to the current market value of their share, minus their proportional share of the outstanding mortgage debt.

The main advantage of extinguishing joint ownership is its lower tax burden compared to a sale, as it is subject to Stamp Duty (Impuesto sobre Actividades Jurídicas Documentadas - AJD) rather than Property Transfer Tax (Impuesto sobre Transmisiones Patrimoniales - ITP).

3. Retaining Joint Ownership and Agreeing Rights of Use

In certain circumstances, the parties decide to temporarily maintain joint ownership of the property. This commonly occurs when immediate liquidity is unavailable to compensate the departing spouse, or when postponing the sale until market conditions improve is preferred.

In these cases, it is crucial to establish a strict allocation of fixed costs (community fees, IBI property tax, special levies) and mortgage repayments within the regulatory agreement (convenio regulador) to prevent future disputes over unpaid obligations.

Use of the Family Home and Child Custody

When evaluating what happens to the home in a divorce, it is essential to distinguish between property ownership (who owns the title) and the right of use and enjoyment (who resides in the property).

The Spanish Civil Code prioritises the best interests of minor children. In sole custody arrangements, the right to use the family home is generally awarded to the minor children and the custodial parent, regardless of which spouse is named on the title register.

In joint custody arrangements, awarding the use of the property is determined on a case-by-case basis. Popular approaches include:

• Alternative use or 'bird's nest' model: The children remain permanently in the family home, while the parents rotate into the home during their respective custody periods.
• Temporary allocation: The right to use the property is granted for a specific period to the spouse demonstrating greater financial need or vulnerability.
• Immediate sale or dissolution: If both parents have sufficient resources to provide suitable housing for the children during their custody periods, the liquidation of the property may be authorised without awarding exclusive right of use to either party.

What Happens to the Outstanding Mortgage After Separation?

The regulatory agreement or court ruling binds the parties involved, but it does not alter existing contracts with financial institutions. For the bank, both former spouses remain jointly and severally liable for the mortgage loan, even if they have formally agreed that only one party will make the repayments.

If one spouse takes full ownership of the property and assumes the entire mortgage debt, a mortgage novation must be processed with the bank to release the other spouse from liability under the loan. The lender will assess the financial solvency of the acquiring spouse and may demand additional guarantees before approving the transfer of liability.

Tax Implications of Property Transfer or Division

Any alteration to property ownership during a marital breakdown carries specific tax consequences:

• Stamp Duty (AJD): Extinction of joint ownership incurs this tax based on the total property value or the value of the transferred share, applying the tax rate established by the relevant autonomous community.
• Personal Income Tax (IRPF): A proportional division through extinction of joint ownership does not give rise to a taxable capital gain or loss for IRPF purposes, provided there are no uncompensated excesses in allocation. In a third-party sale, any capital gain or loss must be declared in the personal tax return.
• Municipal Capital Gains Tax (IIVTNU): Awarding the right of use does not constitute a taxable event for municipal capital gains tax purposes. Furthermore, property transfers resulting from the dissolution of the marital property regime are exempt or non-taxable in most cases under applicable regulations.

Special Cases: Social Housing (VPO) in the Comunidad de Madrid

If the property subject to marital settlement is a subsidised housing unit (VPO) located in the Comunidad de Madrid, the transaction is subject to the regional legal framework governing protected housing.

Whether transferring to a third party or allocating ownership via extinction of joint ownership, the following specific requirements must be met:

• Maximum sale price or valuation: The agreed amount or share valuation cannot exceed the statutory maximum sale price established by the Comunidad de Madrid for the relevant property category and module.
• Right of first refusal and pre-emption (tanteo y retracto): In certain developments with active public protection status, the regional authority retains the right of first refusal to acquire the property.
• De-classification (descalificación) of the property: To sell the property on the open market without price restrictions, voluntary de-classification must be requested from the Dirección General de Vivienda of the Comunidad de Madrid, and any public subsidies or tax exemptions received must be repaid.

Coordinating Legal Strategy and Real Estate Management

Resolving the future of the home following a divorce requires combining family law analysis, tax planning, and technical knowledge of the property market. Drafting transfer agreements without prior verification of mortgage refinancing capacity or the property's legal registration status can create complex deadlocks.

Working with specialist professionals ensures that the regulatory agreement is fully enforceable before notary publics, banking entities, and public administrations, safeguarding the assets of both parties.

At Sky Real Estate, we structure comprehensive solutions for resolving property assets in separation proceedings. Our legal advisory team, backed by our Sky Law European Legal Awards 2023-2025 recognitions, operates in coordination with our credit and real estate brokerage division, registered under code ICI D-286 Banco de España.

To review your specific case and structure the best alternative for your property, contact our property lawyers.