Quick Answer
When divorcing California couples own a home together, they have several options: sell the home and split the proceeds, one spouse buys out the other’s interest, defer the sale until a future date, or jointly own as ex spouses. Each option has different financial, tax, and practical implications. Internal Revenue Code section 121 provides up to $250,000 capital gains exclusion per spouse ($500,000 combined) for home sales when ownership and use tests are met. Selling during the divorce while still married preserves the joint exclusion if both spouses meet the tests. Selling after divorce limits exclusion to $250,000 per spouse. Deferred sales of the family residence under California Family Code section 3800 are common when children are still home; the court orders the home retained for a period (often until the children reach a certain age) before sale. Working with a family law attorney and tax professional is important for the choice that fits your specific situation.Table of Contents
Options for the Family Home
The family home is often the largest asset in a divorce. Decisions about the home affect both spouses’ financial futures, the children’s stability, and tax outcomes. Four main options exist:
- Sell the home and split the proceeds
- One spouse buys out the other’s interest
- Defer the sale to a future date
- Continue joint ownership as ex spouses
Each option has different advantages and disadvantages. The right choice depends on financial circumstances, the children’s needs, tax considerations, and the spouses’ personal preferences.
Selling and Splitting Proceeds
Selling the home during or shortly after divorce is often the simplest option. A board-certified family law specialist can help structure the sale to preserve tax benefits and protect both spouses’ interests.
Advantages of Selling
- Clean separation with no ongoing entanglement
- Both spouses receive cash to fund their new lives
- Eliminates mortgage and maintenance obligations
- Preserves the full $500,000 capital gains exclusion if sold during marriage
- Eliminates disputes about future home maintenance or improvements
- Allows both spouses to purchase new homes
Disadvantages of Selling
- Disrupts children’s environment
- May force sale at unfavorable market conditions
- Real estate sale costs reduce proceeds
- Capital gains taxes may apply if exclusion is exceeded
- Loss of established home equity growth
Buyout of One Spouse
In a buyout, one spouse keeps the home and pays the other spouse their share of the equity. The buyout typically requires:
- Refinancing the mortgage in the keeping spouse’s name only
- Calculating equity (current value minus mortgage balance)
- Paying the leaving spouse their share of the equity
- Removing the leaving spouse from the title
Buyout Mechanics
The keeping spouse must qualify for a new mortgage based on their income alone. The new mortgage often must be large enough to pay the existing mortgage plus the buyout amount.
Example: Home valued at $700,000, mortgage of $300,000, equity of $400,000. Each spouse’s community share is $200,000. The keeping spouse needs a new mortgage of $500,000 (to pay off the existing $300,000 mortgage and pay $200,000 to the leaving spouse).
If the keeping spouse cannot qualify for a $500,000 mortgage on their income alone, the buyout may not be feasible.
Buyout Variations
- Cash buyout from other community property
- Buyout in installments over time (creating ongoing obligations)
- Offset against other property received in division
- Combination of cash and offset
Deferred Sale of Family Residence
California Family Code section 3800 specifically authorizes deferred sales of the family residence. The court can order the home retained for a period before sale. Common scenarios:
When Deferred Sales Apply
- Children still living at home and stability important
- Selling spouse cannot find suitable alternative housing
- Market conditions make immediate sale unfavorable
- Significant equity that requires patience to realize
Common Deferred Sale Terms
- Sale deferred until specific event (children graduate high school, custodial parent remarries)
- Custodial parent has exclusive use during deferral
- Specific allocation of mortgage, taxes, insurance, and maintenance costs
- Treatment of repairs and improvements
- Specific procedures for the future sale
- Distribution formula for sale proceeds
Considerations for Deferred Sales
Deferred sales provide stability for children but create ongoing entanglement. The non occupant spouse cannot use their equity for years. Maintenance disputes can arise. Market conditions may change. Careful drafting of deferred sale provisions in the marital settlement agreement is essential. The case of In re Marriage of Duke (1980) 101 Cal.App.3d 152 provided early guidance on deferred sales for the benefit of minor children, which was later codified in section 3800.
Joint Ownership After Divorce
Some divorced couples continue jointly owning the home, often when one keeps it as a residence. This is less common than other options. Considerations:
- Detailed agreement needed about responsibilities
- Each spouse’s ongoing interest creates potential conflicts
- Income tax implications must be addressed
- Refinancing may still be required
- Future sale decisions require agreement
Most family law attorneys discourage continued joint ownership because of the ongoing entanglement and dispute potential.
Tax Implications
Tax implications of home decisions in divorce:
Internal Revenue Code Section 121
IRC section 121 provides capital gains exclusion for sale of principal residence:
- $250,000 exclusion per single taxpayer
- $500,000 exclusion for married couples filing jointly
- Must own and use as principal residence for 2 of past 5 years
- Can be used once every 2 years
Capital Gains Calculation
Capital gains equals sale price minus selling costs minus tax basis. Tax basis is original purchase price plus capital improvements. The exclusion applies to the gain over the basis.
Example: Home purchased for $400,000, $50,000 in improvements, sold for $900,000 with $54,000 in selling costs. Capital gain calculation: $900,000 minus $54,000 (selling costs) minus $450,000 (basis) equals $396,000 gain. Joint $500,000 exclusion fully covers the gain, no taxes owed.
Transfer During Marriage
Transfers between spouses incident to divorce are not taxable under Internal Revenue Code section 1041. The receiving spouse takes the same tax basis as the transferring spouse. This means the recipient assumes the full capital gains liability when they later sell.
The $500,000 Capital Gains Exclusion
The $500,000 exclusion is significant for many California divorces given the high home values. To preserve the full exclusion:
Selling During Marriage
If the home is sold during the marriage (before final divorce judgment), the full $500,000 exclusion applies if both spouses meet the ownership and use tests. Each spouse must:
- Have owned the home for at least 2 of past 5 years
- Have used the home as principal residence for 2 of past 5 years
These tests typically pose no problem for couples who lived in the home before separation.
Selling After Divorce
If the home is sold after divorce, each spouse can use $250,000 exclusion. If one spouse moves out and the other later sells, the moved out spouse may not meet the use test, losing their share of the exclusion.
Special Use Test Rules
Special rules apply for divorcing couples. If one spouse has been granted use under the divorce decree, the other spouse can count that use as their own for the use test. This protects the spouse who moved out from losing exclusion benefits.
Timing Considerations
Timing of home decisions affects outcomes:
Market Conditions
Real estate market conditions affect the value of all decisions:
- Rising market favors selling (more proceeds)
- Falling market may favor deferred sale or buyout
- Stable market provides flexibility
- Local conditions vary significantly even in California
Children’s Schedule
If selling, timing around school schedules reduces disruption. Common patterns:
- Selling after school year ends
- Maintaining current home until children reach milestones
- Coordinating moves with summer break
Tax Year Considerations
Selling at the end of a tax year may be tax efficient. Selling in early years allows time for tax planning. Sales should coordinate with overall tax strategy.
Practical Selling Steps
If selling the home is the chosen approach:
- Agree on the listing price (may require appraisal)
- Select a real estate agent both spouses approve
- Coordinate showing schedules
- Agree on the negotiation strategy for offers
- Sign listing and sale documents jointly
- Coordinate move out logistics
- Manage closing process
- Distribute proceeds according to the divorce judgment
Disputes during the sale process are common. The marital settlement agreement should specify procedures for resolving disagreements about listing price, offers, and other decisions.
Mortgage Considerations
The mortgage creates specific issues in divorce:
Joint Mortgage Liability
Both spouses remain liable on a joint mortgage even after divorce until the mortgage is paid off or refinanced. Failure of one spouse to pay damages both spouses’ credit. The marital settlement agreement should:
- Specify who pays the mortgage
- Set deadlines for refinancing
- Provide consequences for non payment
- Include indemnification provisions
Refinancing Requirements
Refinancing removes the leaving spouse from the mortgage. This protects them from liability if the other spouse fails to pay. Refinancing requires:
- The keeping spouse qualifying based on individual income
- Sufficient equity to refinance
- Acceptable credit score
- Documentation of the divorce judgment
Inability to Refinance
If the keeping spouse cannot refinance, alternatives include selling the home, restructuring the obligations, or other arrangements. Specific provisions in the marital settlement agreement address what happens if refinancing is not possible.
Special Circumstances
Homes Owned Before Marriage
If one spouse owned the home before marriage, special rules apply. The Moore Marsden formula from In re Marriage of Moore (1980) 28 Cal.3d 366 and In re Marriage of Marsden (1982) 130 Cal.App.3d 426 allocates equity between separate and community property based on contributions during marriage. This is a complex calculation often requiring expert analysis.
Homes Received as Gifts or Inheritance
If a spouse received the home as a gift or inheritance, it is separate property under California Family Code section 770. However, community contributions during marriage (mortgage payments, improvements, maintenance) may create community interests requiring apportionment.
Multiple Residences
Some couples own multiple homes including a primary residence and vacation homes. Each property requires separate analysis. The $500,000 exclusion applies only to the primary residence.
Homes With Underwater Mortgages
If the mortgage exceeds the home value (underwater), the home is a liability rather than an asset. Options include short sale, foreclosure, deed in lieu, or one spouse keeping the home and the related debt.
Frequently Asked Questions
Q: What are my options for the family home in California divorce?
A: Four main options: (1) Sell the home and split the proceeds, providing clean separation and immediate cash. (2) One spouse buys out the other’s interest, allowing one spouse to keep the home if they can qualify for the mortgage. (3) Deferred sale of family residence under California Family Code section 3800, retaining the home for a period (often until children reach milestones) before sale. (4) Continued joint ownership, which is less common due to ongoing entanglement. The right choice depends on financial circumstances, children’s needs, tax considerations, and personal preferences. Working with a family law attorney and possibly a tax professional helps determine the best approach.
Q: How does the capital gains exclusion work in divorce?
A: Internal Revenue Code section 121 provides $250,000 capital gains exclusion per single taxpayer or $500,000 for married couples filing jointly when selling a principal residence. To qualify, you must have owned and used the home as principal residence for 2 of the past 5 years. Selling during the marriage preserves the full $500,000 exclusion. Selling after divorce limits each spouse to $250,000. Special use test rules apply for divorcing couples: if one spouse has court ordered use of the home, the other spouse can count that use as their own. Timing the sale relative to the divorce can significantly affect tax outcomes.
Q: Should I sell the house before or after divorce?
A: Selling before divorce (during marriage) preserves the full $500,000 capital gains exclusion if both spouses meet ownership and use tests. It also provides immediate cash for both spouses and clean separation. Selling after divorce limits the exclusion but may be necessary if you cannot agree during the divorce or if market conditions are unfavorable. Some couples prefer to wait until children reach school break or specific milestones. The decision depends on your specific tax situation, market conditions, children’s needs, and how cooperative you and your spouse can be. Working with both a family law attorney and tax professional helps optimize timing.
Q: What is a deferred sale of family residence?
A: California Family Code section 3800 specifically authorizes deferred sales. The court can order the family home retained for a period before sale, with one spouse (usually the custodial parent of minor children) having exclusive use. Common deferral periods extend until children graduate high school, the custodial parent remarries, or other specific events. The marital settlement agreement specifies allocation of mortgage, taxes, insurance, maintenance, and improvements during deferral, plus how sale proceeds will be distributed when the deferred sale occurs. Deferred sales provide stability for children but create ongoing financial entanglement and dispute potential between former spouses.
Q: How do I buy out my spouse’s interest in the house?
A: Calculate the equity (current value minus mortgage balance), then pay your spouse their share of the community equity (typically 50 percent). You will likely need to refinance the mortgage in your name only, with the new mortgage large enough to pay off the existing mortgage and provide your spouse’s buyout. You must qualify for the new mortgage based on your income alone. Alternative funding sources include other community property as offset, cash savings, investment account distributions, or installment buyouts (creating ongoing obligations). Get the home professionally appraised to establish current value. Some couples agree on value through negotiation; others require court determination. Buyout terms should be specifically detailed in the marital settlement agreement.
Q: What if we cannot agree on what to do with the house?
A: If you cannot agree, the court will decide based on the totality of circumstances. The court considers each spouse’s ability to maintain the home, the children’s stability needs, tax implications, market conditions, and equitable considerations. The most common court orders are either selling the home and dividing proceeds or one spouse buying out the other if feasible. Deferred sales are sometimes ordered when children are still home. The court rarely orders continued joint ownership because of the ongoing dispute potential. Mediation often produces better outcomes than court ordered solutions. Family Court Services mediation under California Family Code section 3170 applies to custody but not directly to property; private mediation is recommended for property disputes.
Q: What if my spouse owns the house from before our marriage?
A: Homes owned before marriage are typically separate property under California Family Code section 770. However, community contributions during marriage (mortgage payments, improvements, maintenance) create community interests requiring apportionment. The Moore Marsden formula from In re Marriage of Moore (1980) 28 Cal.3d 366 and In re Marriage of Marsden (1982) 130 Cal.App.3d 426 calculates the community share based on the ratio of community contributions to total payments. This is a complex calculation typically requiring expert analysis. The owner spouse retains the original separate property value plus the appreciation attributable to separate property contributions. The community shares the appreciation attributable to community contributions. Court orders should specifically address the Moore Marsden calculation.
Q: How do we handle the mortgage in our California divorce?
A: Both spouses remain liable on a joint mortgage even after divorce until the mortgage is paid off or refinanced. If one spouse fails to pay, both spouses’ credit is damaged. The marital settlement agreement should specify who pays the mortgage, when refinancing must occur, and what happens if the keeping spouse cannot refinance. Common arrangements include refinancing within a specific period (typically 6 to 18 months), maintaining a joint mortgage with one spouse paying (creating ongoing risk), selling if refinancing is not possible, or other custom arrangements. Indemnification provisions protect the spouse who is supposed to be released from the mortgage if the other spouse defaults. Consult both a family law attorney and a mortgage professional for the best approach.
Bottom Line
Decisions about the family home are among the most important in California divorce. Four main options exist: sell and split proceeds, buyout by one spouse, deferred sale of family residence under California Family Code section 3800, or continued joint ownership. Internal Revenue Code section 121 provides up to $500,000 capital gains exclusion for married couples and $250,000 per single taxpayer. Selling during marriage preserves the full exclusion. The Moore Marsden formula applies when one spouse owned the home before marriage. Mortgage refinancing is typically required to remove the leaving spouse from liability. The right choice depends on financial circumstances, children’s needs, tax considerations, and personal preferences. Working with a board certified family law specialist and tax professional helps determine the optimal approach for your situation.
If you are facing decisions about the family home in your divorce, a free consultation with a board-certified family law specialist can help you evaluate your options.
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 or tax advice. Real estate and tax issues in divorce involve complex considerations. For advice specific to your situation, consult with a licensed family law attorney and a tax professional. Reading this article does not create an attorney-client relationship with Haslam & Thorne, LLP.
