What Your House Is Really Worth in a Divorce: Embedded Taxes, Prop 13 Value, and the True Cost of Keeping vs. Selling
A $1.5 million house and a $1.5 million 401(k) are NOT worth the same amount. Here's how to calculate what you're actually getting.
- Fair market value ≠ true value. What you can sell for is not what you'll actually receive after taxes and costs.
- Embedded capital gains taxes can reduce your house's true value by $200,000-$400,000+ on a long-held Los Angeles home.
- Your Prop 13 tax base is a hidden asset worth $100,000-$200,000+ over time. Factor this into your division.
- Retirement accounts have higher embedded taxes than real estate (33-50% vs. 28-33%). Don't trade equal for unequal.
The $300,000 Mistake
"I'll take the house, you take the retirement accounts."
This is one of the most common, and potentially most expensive, mistakes in divorce property division.
On paper, it looks fair. The house is worth $1.5 million. The 401(k) is worth $1.5 million. Fifty-fifty, right?
Wrong.
What people miss: a $1.5 million house and a $1.5 million 401(k) do NOT have the same value to you. One has embedded capital gains taxes. The other has embedded income taxes. One might have a valuable Prop 13 property tax base. The other doesn't.
This is something I explain to almost every divorcing couple I work with. On paper, the division looks equal. In reality, one spouse is often walking away with significantly less. The attorneys are focused on the legal settlement. The spouses are focused on just getting through the divorce. Nobody is running the actual numbers on what these assets will be worth after taxes.
That's where I come in. Before anyone signs anything, I make sure both parties understand what they're actually getting.
Trading "equal" amounts of these assets can mean one spouse walks away with $300,000+ less in true value than the other. And neither realizes it until years later.
Fair Market Value ≠ Net Value
What Fair Market Value Means
Fair market value (FMV) is the price a willing buyer would pay and a willing seller would accept in an arm's length transaction. It's the standard your attorney uses because it's the legal standard for property division.
When an appraiser says your home is worth $1.5 million, that's the fair market value.
Why FMV Misleads in Divorce
FMV tells you what someone would pay for the asset. It doesn't tell you what you'll actually receive after:
- Capital gains taxes (when you sell the house)
- Income taxes (when you withdraw from retirement accounts)
- Selling costs (commissions, closing costs)
- Ongoing property tax differences
After-tax value, sometimes called "true value" or "net value," is what you actually have left after all taxes and costs. This is what matters for fair property division.
Embedded Capital Gains: The Hidden Liability
When you sell your home, you'll owe capital gains tax on the gain: the difference between sale price and cost basis.
How Cost Basis Affects Future Taxes
Cost basis is generally what you paid for the property, plus improvements, minus depreciation if applicable.
Capital gain is sale price minus cost basis.
Tax rate on long-term capital gains: 20% federal (for high earners) + 13.3% California = up to 33.3%.
Long-Held Homes = Large Embedded Gains
The longer you've owned your home, the larger the embedded capital gain. Consider these two scenarios:
- Current value: $1,500,000
- Purchase price (2018): $1,100,000
- Capital gain: $400,000
- Exclusion available (married): $500,000
- Taxable gain: $0
- Embedded tax liability: $0
- Current value: $1,500,000
- Purchase price (1998): $350,000
- Capital gain: $1,150,000
- Exclusion available (single post-divorce): $250,000
- Taxable gain: $900,000
- Embedded tax liability: ~$300,000
Same fair market value. Vastly different true values.
The math matters more than you might think.
I've seen spouses agree to divisions that cost them hundreds of thousands of dollars because nobody calculated the embedded taxes. Let me help you understand what your house is actually worth.
(213) 444-2225Call or text. Confidential, no pressure.
The Prop 13 Base: Hidden Asset Value
If you've owned your Los Angeles home for decades, your property tax bill is dramatically lower than what a new buyer would pay. This is real value.
Why Low Property Tax Is Valuable
- Your current property tax: $4,000/year (1990 purchase, Prop 13 base)
- If home were reassessed: $18,000/year (1% of current $1.8M value)
- Annual benefit: $14,000
As long as you own the home, you're "saving" $14,000 per year compared to someone buying at today's price.
Present Value of Future Tax Savings
This annual benefit has a present value. If you expect to remain in the home for 15 years, the Prop 13 benefit represents significant value:
| Years | Annual Benefit | Simple Total | Present Value (5%) |
|---|---|---|---|
| 5 | $12,500 | $62,500 | ~$54,000 |
| 10 | $12,500 | $125,000 | ~$97,000 |
| 15 | $12,500 | $187,500 | ~$130,000 |
| 20 | $12,500 | $250,000 | ~$156,000 |
If one spouse keeps the house and its Prop 13 base, that value should be considered in the division. Don't give away $100,000+ without realizing it.
Comparing Assets: Apples to Apples
I've sat in meetings where an attorney or mediator proposes a "50/50 split" that's actually closer to 60/40 when you account for embedded taxes. Not because anyone is trying to be unfair, but because most people simply don't think about assets this way.
Here's how to calculate the true after-tax value of different assets:
Side-by-Side Comparison
| Asset | FMV | Embedded Tax | Selling Costs | True Value |
|---|---|---|---|---|
| House (low basis) | $1,500,000 | ~$283,000 | ~$92,500 | ~$1,124,500 |
| House (high basis) | $1,500,000 | ~$0 | ~$92,500 | ~$1,407,500 |
| 401(k) | $1,500,000 | ~$550,000 | $0 | ~$950,000 |
| Cash | $1,500,000 | $0 | $0 | $1,500,000 |
The lesson: "Equal" dollar amounts are not equal after taxes.
Real Comparison Example
Consider this common scenario:
- House: $1,500,000 FMV, $400,000 cost basis, $3,000/year property tax
- 401(k): $1,500,000
- Brokerage account: $500,000 (minimal embedded gains)
Traditional "equal" division:
- Spouse A: House ($1,500,000)
- Spouse B: 401(k) ($1,500,000)
- Split brokerage 50/50 ($250,000 each)
True value analysis:
Spouse A (house):
- FMV: $1,500,000
- Embedded capital gains tax: -$283,000 (payable when sold)
- Prop 13 value (10-year): +$100,000
- Brokerage: $250,000
- True position: approximately $1,567,000 in assets, with $283,000 deferred tax
Spouse B (401k):
- FMV: $1,500,000
- Embedded income tax: -$550,000 (payable when withdrawn)
- Brokerage: $250,000
- True position: approximately $1,200,000 in assets
To achieve true equality, Spouse B should receive more of the brokerage account, or Spouse A should make an equalization payment.
Don't trade equal for unequal.
Before you sign anything, let's make sure you understand what you're actually getting. A 30-minute conversation could save you $300,000.
Call or Text: (213) 444-2225Everything we discuss stays between us.
Deferred Maintenance: The Negative Asset
Beyond taxes, physical condition affects true value.
If your home needs repairs, those are liabilities that reduce true value:
- Roof replacement needed: -$15,000 to $30,000
- HVAC system failing: -$8,000 to $15,000
- Foundation issues: -$10,000 to $50,000+
- Plumbing problems: -$5,000 to $20,000
If Spouse A is keeping a house that needs a $25,000 roof, the "true value" to them should be reduced by $25,000. Either reduce the house's value in division calculations, or give Spouse A credit toward other assets.
Role of the CDFA
For complex estates, consider working with a Certified Divorce Financial Analyst (CDFA).
What They Do
A CDFA specializes in the financial analysis of divorce. They calculate true after-tax values of all marital assets, model different division scenarios, project long-term financial impacts of settlement choices, and identify hidden costs and benefits in proposed divisions.
When You Need One
Consider a CDFA if:
- Total estate exceeds $1 million
- Significant disparity between asset types (real estate vs. retirement vs. cash)
- Long-held home with substantial appreciation
- Complex retirement accounts (pensions, stock options, deferred comp)
- One spouse significantly less financially sophisticated
Frequently Asked Questions
Is the house or 401(k) a better asset in divorce?
Neither is inherently "better." It depends on embedded taxes and your situation. A house with a high cost basis and valuable Prop 13 base may be worth more after taxes than a 401(k) of equal FMV. A house with a low basis and massive embedded gains may be worth less. Calculate the after-tax value of each before deciding.
How do I calculate embedded capital gains on my house?
Subtract your cost basis (original purchase price plus improvements) from current fair market value. Then subtract your available exclusion ($500,000 married, $250,000 single). The remainder is your taxable gain. Multiply by your combined federal and state rate (typically 28-33%) to estimate embedded tax.
Should I get an appraisal or use a Realtor's market analysis?
For divorce property division, a formal appraisal from a licensed appraiser is typically preferred because it is more defensible and detailed. However, a comparative market analysis (CMA) from an experienced realtor can provide a reliable value estimate and may be sufficient for agreed settlements. Discuss with your attorney.
What if my spouse and I disagree on the home's value?
Options include getting two independent appraisals and averaging them, agreeing to use one appraiser selected jointly, or having each spouse's appraiser prepare a value and then negotiating. Your settlement agreement should specify how valuation disputes are resolved.
Your Next Steps
Before finalizing your property division:
- Calculate your home's cost basis accurately
- Estimate embedded capital gains tax
- Value your Prop 13 property tax base
- Compare true after-tax values of all assets
- Consider a CDFA for complex estates
- Call or text (213) 444-2225 to discuss your specific situation
Fair Market Value Is Just the Starting Point
Your home's true value in divorce depends on embedded taxes, Prop 13 benefits, and deferred maintenance. Let's calculate what you're actually working with before you finalize anything.
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. Tax calculations are estimates and will vary based on individual circumstances. Please consult with a qualified CPA, tax attorney, and Certified Divorce Financial Analyst (CDFA) for guidance specific to your situation. Justin Borges and The Borges Real Estate Team are real estate professionals, not attorneys, CPAs, or tax advisors.
