Quick Answer In a divorce, the marital home is handled in one of three main ways. The couple can sell the house and split the proceeds, one spouse can buy out the other’s share, or the couple can defer the sale to a later date. The right choice depends on equity, ability to refinance, custody of children, and each spouse’s housing needs. In community property states like California, the home is usually treated as community property and the equity is divided equally under California Family Code section 2550. Capital gains tax can usually be avoided on transfers between spouses under 26 U.S.C. section 1041, and on the sale of a primary residence up to $250,000 per spouse under 26 U.S.C. section 121.
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The Three Main Options for the House
The marital home is often the largest asset a divorcing couple owns. Decisions about the house drive much of the financial settlement. There are three main paths.
| Option | How It Works | Best For |
| Sell the house | Sell to a third party, split proceeds | Couples with little equity or no need for one spouse to stay |
| One spouse buys out the other | Refinance and pay half the equity to the other | One spouse strongly wants the house and can qualify for a refinance |
| Deferred sale | Postpone sale until a future trigger (children leaving home, refinance, set date) | Couples with minor children where stability matters |
Option 1 Selling the House
Selling the marital home is often the cleanest option. The house is listed with a real estate agent, sold to a third party, and the proceeds are divided between the spouses. Selling works well when:
- Neither spouse can afford the house alone
- Both spouses want a fresh start
- The mortgage cannot be refinanced into one spouse’s name
- The house is too large or too expensive for one spouse
- The couple needs cash from the equity for other financial needs
Sale Process During Divorce
Selling during divorce is more complex than a regular home sale. Both spouses must sign listing agreements, accept offers, and close the sale. If the spouses disagree, the court can order the sale and appoint a real estate agent. The proceeds are placed in escrow until the divorce is final, then divided per the divorce judgment.
Costs of Selling
Standard selling costs typically total 7 to 10 percent of the sale price:
- Real estate commission: 5 to 6 percent of sale price (split between buyer’s and seller’s agents)
- Closing costs: 1 to 3 percent of sale price
- Title insurance and escrow fees: 0.5 to 1 percent
- Repairs and staging: variable, often 1 to 3 percent
Option 2 One Spouse Buys Out the Other
In a buyout, one spouse keeps the house and pays the other spouse half the equity. This is common when one spouse has a strong emotional attachment to the house, has children living there, or has the financial capacity to refinance the mortgage into their name alone.
How a Buyout Works
The basic steps are:
- Get the house appraised to determine current market value
- Calculate the current equity (market value minus outstanding mortgage)
- Determine each spouse’s share of the equity
- The keeping spouse refinances the mortgage to remove the leaving spouse from the loan
- The keeping spouse pays the leaving spouse their share of the equity (either as cash, an offsetting asset, or financed as part of the refinance)
- The leaving spouse signs a deed transferring their interest in the house to the keeping spouse
When a Buyout Works Best
Buyouts work when the keeping spouse:
- Can qualify for a new mortgage based on their income alone
- Has enough cash or other assets to pay the equity buyout
- Has a long term financial plan that can sustain the mortgage payments
- Has a strong attachment to the house or its location
Buyouts can fall through when the keeping spouse cannot qualify for a refinance, the interest rate has risen significantly since the original mortgage, or the house has too little equity to support the buyout.
Option 3 Deferred Sale
A deferred sale postpones the actual sale to a later date. The most common reason is to keep children in their home through critical years. California recognizes deferred sale of the family residence in California Family Code section 3800.
How a Deferred Sale Order Works
Under California’s deferred sale of the family residence:
- One spouse (usually the custodial parent) remains in the house with the children
- The other spouse leaves but retains ownership rights
- The mortgage continues with both spouses on the loan
- The court sets a future trigger event for the sale (often the youngest child reaching 18 or graduating high school)
- At the triggering event, the house is sold and proceeds are divided
The court considers numerous factors before ordering a deferred sale, including the financial ability of the parties to maintain the mortgage, the impact on the children, and the time the children would benefit from staying in the home.
Risks of Deferred Sale
- Both spouses remain on the mortgage, affecting each spouse’s ability to buy other property
- Disputes can arise about maintenance, repairs, and improvements
- Property tax and homeowners insurance responsibilities must be specified
- Market changes between divorce and sale can significantly affect outcomes
- If the resident spouse stops paying the mortgage, the leaving spouse’s credit is at risk
How the House Is Valued
The starting point for any decision about the house is determining its current market value. Three valuation methods are common:
Professional Appraisal
A licensed appraiser conducts a formal valuation, considering recent comparable sales, the condition of the house, and market trends. A standard appraisal costs $400 to $800 and is usually the most defensible value in a contested case. Both spouses should agree on the appraiser, or each can hire one and average the results.
Comparative Market Analysis (CMA)
A real estate agent prepares a comparative market analysis showing what similar houses have sold for recently. A CMA is usually free if the agent expects to list the house. CMAs are less formal than appraisals but generally accurate for typical houses in active markets.
Automated Valuation Models
Online tools such as Zillow Zestimate and Redfin Estimate provide quick valuation estimates. These are often inaccurate for specific properties and should never be the sole basis for a divorce property division. Use them as a rough guide only.
Calculating Each Spouse’s Equity
Equity is the current market value of the house minus the outstanding mortgage and any other liens. In community property states like California, equity earned during the marriage is community property under California Family Code section 760 and is divided equally under California Family Code section 2550. For complex equity calculations involving business or commingled assets, expert assistance may be needed.
Basic equity calculation example:
- Current market value: $700,000
- Mortgage balance: $400,000
- HELOC balance: $50,000
- Total equity: $250,000
- Each spouse’s share in California: $125,000
Adjustments to the basic equity may be required for:
- Separate property contributions to the down payment
- Improvements paid with separate property
- Selling costs if the house will be sold
- Outstanding tax liens
- Deferred maintenance or known repairs
Refinancing After Divorce
If one spouse keeps the house, the mortgage typically must be refinanced to remove the other spouse’s liability. Refinancing involves applying for a new mortgage based solely on the keeping spouse’s income, assets, and credit.
Qualifying for a Refinance
Lenders evaluate the keeping spouse based on:
- Income (including any alimony or child support received, with documentation of consistent receipt)
- Debt to income ratio
- Credit score
- Loan to value ratio (current equity in the house)
- Reserves (savings to cover several months of mortgage payments)
Lenders typically require alimony and child support to have been received for at least 6 months and to continue for at least 3 more years to count as income. This means the divorce timeline can affect when refinancing is possible.
Refinance Costs
A typical refinance costs $4,000 to $10,000:
- Origination fees: 0.5 to 1 percent of loan amount
- Appraisal fee: $400 to $800
- Title insurance: $1,000 to $2,500
- Escrow and recording fees: $500 to $1,500
- Underwriting and processing fees: $1,000 to $1,500
Capital Gains Tax on Marital Homes
Selling a house can trigger capital gains tax on the appreciation. Two important federal tax provisions affect divorcing couples.
Section 1041: Transfers Between Spouses
Under 26 U.S.C. section 1041, transfers of property between spouses incident to divorce are tax free. This means one spouse can transfer the entire house to the other in a divorce without any immediate capital gains tax. The receiving spouse takes the original cost basis.
This is important when one spouse buys out the other. The transfer of the leaving spouse’s interest to the keeping spouse is tax free under section 1041. But the keeping spouse inherits the original cost basis, which can create a larger capital gains tax when the house is eventually sold.
Section 121: Primary Residence Exclusion
Under 26 U.S.C. section 121, a person can exclude up to $250,000 of capital gains on the sale of a primary residence if they have lived in the home for at least 2 of the last 5 years. A married couple filing jointly can exclude up to $500,000.
After divorce, each spouse can use their own $250,000 exclusion when they later sell the house. The key requirement is that the spouse must have owned and used the home as a primary residence for at least 2 of the 5 years before the sale.
Example: When Capital Gains Tax Becomes a Concern
Consider a couple who bought a house for $400,000 ten years ago. The house is now worth $1,200,000, an appreciation of $800,000. If they sell during the marriage and file jointly, they can exclude $500,000 and pay capital gains on $300,000. If they divorce and one spouse keeps the house, then sells five years later for $1,400,000, the keeping spouse has a gain of $1,000,000 with only a $250,000 exclusion available. The result is capital gains tax on $750,000.
This is why some divorcing couples choose to sell the house at the time of divorce rather than transferring it to one spouse. The combined $500,000 exclusion is often more valuable than keeping the house.
What Happens If You Owe More Than the House Is Worth
A house with a mortgage balance higher than its current market value has negative equity. This creates significant complications in divorce:
- Selling requires the spouses to bring cash to closing to pay off the mortgage
- Refinancing is usually impossible because lenders require positive equity
- A short sale (selling for less than the mortgage balance with lender approval) may be possible but damages credit
- Foreclosure becomes a risk if either spouse stops paying
Options for handling underwater houses include:
- Continue making payments until the market recovers or the principal is paid down enough to refinance
- Negotiate a short sale with the lender
- Allow foreclosure (with severe credit consequences)
- Stay in the marriage until the house has equity (sometimes a real consideration)
A House Owned Before Marriage
A house owned by one spouse before marriage is separate property under California Family Code section 770. The other spouse generally does not have an ownership interest in the pre marriage house.
However, the community can acquire a partial interest in the pre marriage house if community funds are used to pay the mortgage, taxes, insurance, or improvements during the marriage. The most common situation is when the owner spouse continues to pay the mortgage from their salary (which is community property during the marriage).
The Moore Marsden Formula
California uses the Moore Marsden formula (from the cases In re Marriage of Moore (1980) and In re Marriage of Marsden (1982)) to calculate the community’s interest in a separate property home. The formula provides for:
- The community is reimbursed for its contributions to principal reduction during the marriage
- The community shares in the appreciation of the home in the same proportion that community funds contributed to the principal reduction
- The owner spouse retains all pre marriage appreciation
- The owner spouse retains all post marriage appreciation attributable to their separate property contribution
Moore Marsden calculations are complex and require detailed records of mortgage payments throughout the marriage. In contested cases, forensic accountants are often hired to perform the calculation. The fee for a Moore Marsden analysis typically ranges from $2,500 to $10,000.
Frequently Asked Questions
Q: Can I keep the house in divorce without paying my spouse?
A: Generally no. In community property states like California, the equity in the house earned during the marriage is community property and your spouse is entitled to half. You can keep the house, but you typically need to pay your spouse their share through cash, by refinancing and taking cash out, or by offsetting with other assets. If you owned the house before marriage, the community’s interest is calculated using the Moore Marsden formula in California, which may give your spouse a smaller share.
Q: Who has to leave the house during divorce?
A: Neither spouse is required to leave during the divorce. Both spouses can remain in the house until the divorce is final, unless there is a domestic violence restraining order that requires one spouse to leave. In high conflict situations, one spouse often voluntarily moves out for emotional reasons, but this is not legally required. Moving out does not affect your interest in the house, but it can affect your custody arrangement.
Q: Do I have to sell my house in divorce?
A: Not necessarily. You can sell the house, one spouse can buy out the other, or you can defer the sale to a later date. The choice depends on equity, mortgage qualification, custody of children, and each spouse’s financial needs. Courts generally accept whichever option the spouses agree to, and will only force a sale if the spouses cannot agree.
Q: How is the equity in the house divided?
A: In community property states like California, equity earned during the marriage is divided equally under California Family Code section 2550. If one spouse owned the house before marriage, the community’s interest is calculated using the Moore Marsden formula, which usually results in a smaller share for the non owning spouse. In equitable distribution states, the court has discretion to divide equity fairly but not necessarily equally.
Q: Can I refinance the house in my name only?
A: Yes, if you can qualify based on your income, debt, and credit alone. Lenders will evaluate you as a single applicant and may count alimony or child support as income if you have been receiving it for at least 6 months and will continue receiving it for at least 3 more years. If you cannot qualify alone, you may need a co signer or you may need to wait until you have established more income history before refinancing.
Q: Do I owe taxes if my spouse buys out my interest in the house?
A: No. Transfers of property between spouses incident to divorce are tax free under 26 U.S.C. section 1041. You can transfer your interest in the house to your spouse without any immediate tax consequences. However, the receiving spouse takes the original cost basis, which can result in larger capital gains tax when the house is eventually sold by the keeping spouse.
Q: Can my ex stop the sale of the house after divorce?
A: If the divorce judgment requires the house to be sold, neither spouse can stop the sale. Both must cooperate. If one spouse refuses to cooperate, the other can return to court for an order compelling the sale. The court can appoint a real estate agent, set the listing price, and even sign documents on behalf of the uncooperative spouse.
Q: What is a deferred sale of family residence?
A: A deferred sale of family residence is a court order that postpones the sale of the marital home to a future date, allowing the custodial parent and children to remain in the home for a defined period. California Family Code section 3800 governs deferred sales. The court considers factors including financial capacity to maintain the mortgage and the impact on the children. The order specifies when the house will be sold (often when the youngest child reaches 18 or graduates high school).
Bottom Line
The marital home is usually the biggest single decision in a divorce property settlement. Three main options exist: sell it, buy out the other spouse, or defer the sale. The right choice depends on equity, mortgage qualification, custody arrangements, and tax consequences. In California, equity earned during the marriage is community property divided equally under California Family Code section 2550. Pre marriage homes require Moore Marsden analysis. Capital gains tax can usually be deferred or excluded under 26 U.S.C. sections 121 and 1041.
Because the house often represents most of a couple’s wealth, getting the analysis right is critical. A free consultation with a board-certified family law specialist can help you understand your options and the financial implications of each.
About the Author
Donald Glen Haslam, Esq. is a Board-Certified Family Law Specialist by the California State Bar Board of Legal Specialization and a senior partner at Haslam & Thorne, LLP in Ontario, California. He has practiced family law exclusively for over 40 years, representing families throughout San Bernardino County and the Inland Empire. Reviewed by Brian George Thorne, Esq., Board-Certified Family Law Specialist.
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Disclaimer: This article is for general informational purposes only and does not constitute legal advice. Property division law is governed by state-specific statutes and varies significantly by jurisdiction. Tax treatment depends on current federal and state law and individual circumstances. Every property division situation is unique. For advice specific to your circumstances, consult with a licensed family law attorney and a tax professional in your state. Reading this article does not create an attorney-client relationship with Haslam & Thorne, LLP.
