Keeping the House Together After Divorce: California Rules for Co-Ownership, Deferred Sales, and Tax Implications
Sometimes selling right away isn't the right answer. California law allows you to keep the house together for the kids. Here's how to structure it so everyone is protected.
- California Family Code 3800-3810 allows courts to order deferred sale of the family home to minimize disruption to children.
- Clear agreements are essential. Who pays mortgage, taxes, repairs? What triggers the eventual sale? Get it in writing.
- Both spouses can preserve their capital gains exclusion if the divorce decree includes proper residence rights language.
- Document everything. Payment records, repairs, and agreements will matter when it's time to sell.
Why Some Couples Keep the House Together
Not every divorcing couple sells the house immediately. Sometimes it makes more sense to delay the sale and maintain joint ownership for a period after the divorce.
I see this situation more often than you might think. A couple is divorcing, but neither wants to uproot the kids from their school and friends. Or maybe one spouse can't afford to buy the other out right now, but they will be able to in a few years. The question is always the same: "Can we just keep the house together for now?"
The answer is yes, but it requires careful planning. I've seen co-ownership arrangements work beautifully when they're structured properly. I've also seen them turn into years of conflict when the details weren't nailed down upfront.
Common reasons for co-ownership include:
- Children staying in their school and social environment
- Neither spouse can afford to buy out the other right now
- Current market conditions are unfavorable
- Complex financial situations requiring more time to unwind
California law specifically provides for this arrangement. Under Family Code 3800-3810, courts can order a "deferred sale of home" to minimize disruption to children.
But co-ownership after divorce creates its own complications. Who pays the mortgage? What happens when one party wants out? How do you protect both spouses' tax benefits?
California's Deferred Sale of Home Orders
Family Code 3800-3810: The Legal Framework
California Family Code sections 3800-3810 allow courts to order a temporary delay in selling the family home. This isn't automatic. It requires specific findings and serves specific purposes.
When Courts Order Deferred Sales
A court may order a deferred sale when:
- The economic or emotional needs of the children would be served
- The custodial parent has custody more than 50% of the time
- The deferred sale is financially feasible
- The order is not otherwise inequitable to the non-custodial spouse
The key factor is children's welfare. Courts don't grant deferred sales simply because one spouse wants to stay. There must be a demonstrated benefit to the children.
Typical Duration
Deferred sale orders typically last until:
- The youngest child turns 18 or graduates high school
- The custodial parent remarries or cohabitates
- The custodial parent wants to sell
- A specified date in the order
What the Order Must Include
A proper deferred sale order specifies:
- Which spouse resides in the home
- Who pays the mortgage, property taxes, and insurance
- Who pays for maintenance and repairs
- Circumstances that trigger the eventual sale
- How proceeds will be divided
- Capital gains treatment
Who Pays What During Co-Ownership
This is where most post-divorce disputes arise. Clear documentation is essential.
Mortgage Payments
Typical arrangement: The residing spouse pays the mortgage during the co-ownership period. This payment is usually NOT considered to be building equity for them. It's treated as occupancy cost (similar to rent).
Alternative: Split payments continue, with adjustments at final sale.
The non-resident spouse remains on the mortgage. If the residing spouse misses payments, the non-resident's credit is affected. Make sure your agreement addresses what happens if payments are missed.
Property Taxes and Insurance
Usually paid by the residing spouse as part of their occupancy costs. Property taxes are deductible by whoever pays them, which should be specified in your agreement.
Maintenance and Repairs
This is where conflicts occur most often.
Routine maintenance: Usually the responsibility of the residing spouse (lawn care, minor repairs, regular upkeep).
Capital improvements: Major repairs (roof, HVAC, foundation) are typically shared, as they affect the property value both spouses will benefit from at sale.
Documentation essential: Keep records of all expenses. At the eventual sale, these may be credited or adjusted.
"Epstein Credits" for Unequal Contributions
If one spouse pays more than their share, particularly toward mortgage principal, they may be entitled to reimbursement at sale. These are called "Epstein credits" (from the case Marriage of Epstein).
Non-resident spouse continues paying half the mortgage to build equity. At sale, they receive credit for principal payments made during the deferred period.
Your agreement should specify whether Epstein credits apply and how they'll be calculated.
Money and co-parenting are hard enough without unclear agreements.
I help couples think through all the "what ifs" before they become problems. Let's make sure your arrangement protects everyone, especially the kids.
(213) 444-2225Call or text. Confidential, no pressure.
The Capital Gains Question: Protecting Both Exclusions
Here's where co-ownership gets tax-complicated: how do you preserve both ex-spouses' ability to claim the $250,000 capital gains exclusion?
The Residence Test Problem
To claim the exclusion, you must have lived in the home as your primary residence for 2 of the 5 years before sale.
The residing spouse continues meeting this test. But what about the ex-spouse who moved out?
The Decree-Residence Rule: Protecting the Non-Resident
IRS regulations provide that if your divorce decree grants one spouse the right to live in the home, the non-resident spouse is treated as using the property as their principal residence during that period.
The non-resident ex-spouse can continue accumulating time toward the 2-of-5-year test as long as: (1) the divorce decree explicitly grants the other spouse residence rights, (2) the property remains their ownership interest, and (3) the eventual sale occurs while they still meet the test.
Documentation Requirements
This isn't automatic. Your divorce decree must explicitly:
- Grant the residing spouse the right to occupy the home
- Specify this is pursuant to the divorce settlement
- Identify the property by address
"Wife shall have the exclusive right to occupy the residence located at [address] as her primary residence until [trigger event]. Husband's ownership interest shall continue during this period, and this occupancy right is granted pursuant to this divorce decree."
Work with your attorney and a tax advisor to get the language right.
Common Problems with Co-Ownership
One Party Wants to Sell Early
The residing spouse has a new opportunity and wants out. Or the non-resident spouse needs their equity for a down payment on a new home.
Prevention: Include provisions for early sale by mutual agreement, or buyout options with clear pricing mechanisms.
Disagreements on Maintenance
The roof needs replacement. The non-resident spouse thinks it can wait. The residing spouse wants it done now.
Prevention: Specify a dollar threshold above which both parties must approve, or designate a third party (property manager, agreed contractor) to assess necessity.
New Relationships and the Home
The residing spouse's new partner moves in. Does this trigger the cohabitation clause? What if they claim it's not "romantic"?
Prevention: Define cohabitation clearly (e.g., "overnight stays exceeding X nights per month for Y consecutive months").
These are the situations I help couples think through before they finalize their agreement. It's much easier to address "what if" scenarios when everyone is still cooperating than to figure them out years later when you're not speaking to each other.
You're trying to do the right thing for your children.
Co-ownership can work when it's structured properly. I've helped many families navigate this, and I can help you understand your options.
Call or Text: (213) 444-2225Everything we discuss stays between us.
Real Example: Structuring a Deferred Sale
Consider a typical situation in Los Angeles:
- Divorcing couple in Glendale, CA
- Two children, ages 10 and 14
- Home value: $1,200,000
- Mortgage balance: $400,000
- Equity: $800,000
- Mom has primary custody; dad sees kids every other weekend
Residence: Mom lives in home with children.
Payments:
- Mom pays mortgage, property tax, insurance (approximately $4,200/month total)
- Mom pays routine maintenance up to $500/occurrence
- Repairs over $500 split 50/50 with prior notice
- Dad continues paying 50% of mortgage principal (building equity, Epstein credit)
Triggers for sale:
- Youngest child turns 18 OR graduates high school, whichever is later
- Mom remarries
- Mom cohabitates (defined as overnight guest 4+ nights/week for 3+ consecutive months)
- Mom moves out
- Either party requests sale after June 2028 (earliest exit)
Division formula:
- Net proceeds split 50/50
- Dad receives Epstein credit for principal payments during deferred period
- Mom receives credit for any capital improvements over $500 paid from her funds
Tax provisions:
- Decree explicitly grants Mom residence rights
- Both parties intend to claim capital gains exclusion
- Each reports gain proportional to their share of proceeds
Documentation Checklist
Before finalizing your co-ownership arrangement:
- Property address and legal description
- Which spouse has residence rights
- Duration of deferred sale
- All trigger events for sale
- Payment responsibilities (mortgage, taxes, insurance, maintenance)
- Threshold for shared capital improvements
- Epstein credit provisions (if any)
- Division of proceeds formula
- Capital gains treatment and exclusion intentions
- Refinancing rights and restrictions
- Dispute resolution mechanism
Frequently Asked Questions
Can we keep the house together after divorce without a court order?
Yes. You can agree to co-ownership and document it in your marital settlement agreement without a formal "deferred sale of home order." However, having it incorporated into a court order provides enforcement mechanisms and clarity for both parties.
Does the spouse living in the house build more equity?
Not typically. Mortgage payments by the residing spouse are usually treated as occupancy costs (like rent), not equity building. The ownership shares remain as specified in the divorce. However, you can agree otherwise, for example, giving the residing spouse credit for principal reduction.
What if my ex won't agree to sell when the trigger occurs?
If your agreement is incorporated in a court order, you can petition the court to enforce the sale. If the trigger condition is clearly met, courts will typically order the sale to proceed. Having clear, unambiguous triggers prevents disputes.
Can I buy out my ex's share later instead of selling?
Yes, if both parties agree. Your co-ownership agreement can include a buyout option with a pricing mechanism (such as an average of two appraisals). This gives the residing spouse first opportunity to purchase before a sale to third parties.
Your Next Steps
If co-ownership might be right for your situation:
- Assess whether children's welfare supports a deferred sale
- Calculate whether co-ownership is financially feasible
- Work with your attorney to draft clear terms covering all contingencies
- Ensure capital gains protection language is included
- Document everything during the co-ownership period
- Call or text (213) 444-2225 to discuss your specific situation
Your Kids Come First. Let's Make Sure the Agreement Does Too.
Co-ownership after divorce requires clear terms and proper documentation. Before you finalize anything, let's make sure your arrangement works for everyone.
Call or Text: (213) 444-2225Available 7 days a week. Confidential conversation, no obligation.
Disclaimer
The information provided in this guide is for educational purposes only and does not constitute legal, tax, or financial advice. Family law and tax rules are complex and subject to change. Please consult with a qualified family law attorney and tax professional for guidance specific to your situation. Justin Borges and The Borges Real Estate Team are real estate professionals, not attorneys or tax advisors.
