Divorce and Your Los Angeles Home: The Complete 2026 Guide to Selling, Buying Out, or Keeping Your Property Without Costly Mistakes
Capital gains timing can mean an $83,000+ difference. Prop 19 rules mean only one spouse gets the benefit. The decisions you make in the next few months will affect your finances for decades.
- Four options for your home: Sell and split, buyout, co-own, or offset against other assets. Each has different tax consequences.
- Capital gains timing matters: Selling before vs. after divorce can mean $83,000+ difference in taxes.
- Prop 19 is one-spouse-only: Only one spouse can claim the property tax transfer benefit. This must be negotiated.
- Fair market value ≠ true value: A $1.5M house is not equal to $1.5M in retirement accounts.
- Both spouses should be involved from day one. Alignment prevents the problems that derail sales.
The Biggest Financial Decision of Your Divorce
Your home is likely the largest asset you'll divide in your divorce. For most Los Angeles couples, we're talking about a property worth $1 million, $1.5 million, or more, representing years of mortgage payments, appreciation, and memories.
The decisions you make about this asset in the next few months will affect your finances for decades.
I've been helping divorcing couples navigate these decisions for over 13 years. The pattern is consistent: those who understand the tax implications before finalizing their settlement come out significantly better than those who just "want it over with."
Here's what makes this so challenging: the rules governing divorce real estate in California are genuinely complex. Capital gains exclusions change based on timing. Property tax benefits can only go to one spouse. The "fair market value" your attorney references doesn't account for embedded taxes that could take a massive bite out of what you actually receive.
One thing I wish divorcing homeowners understood from the start: it's okay, and actually essential, for both spouses to have discussions with their real estate agent together. Not one spouse choosing and the other going along with it. Both people need to be on the same page from day one, or problems compound quickly.
Your Four Options for the Marital Home
Every divorcing couple with real estate faces the same fundamental question: what do we do with the house? In California, you essentially have four paths forward.
Option A: Sell and Split the Proceeds
The most straightforward approach is selling the home and dividing the net proceeds according to your settlement agreement.
How it works: You list the home, accept an offer, close escrow, pay off the mortgage and selling costs, and split what's left. In California community property law, that's typically 50/50 unless you've negotiated otherwise.
When it makes sense: This option works well when both spouses want a clean break, neither can afford to buy out the other, or when the tax implications of selling now are favorable.
I recently helped a couple sell their townhome in Sylmar, a property they'd originally purchased with my help. Before listing, we had pre-sale discussions about what they agreed on, what they didn't, what was realistic, and what wasn't. We were upfront about everything. Result: the home sold $15,000 over asking price because both spouses were aligned from the start.
Option B: One Spouse Buys Out the Other
In a buyout scenario, one spouse keeps the home by purchasing the other spouse's share of equity.
How it works: You determine the home's fair market value, subtract any mortgage balance to calculate equity, and the keeping spouse pays the departing spouse their share. The keeping spouse typically refinances the existing mortgage into their name alone.
The challenge: In today's interest rate environment, qualifying for a refinance on a single income is the biggest obstacle. Many spouses discover they can't qualify to buy out their partner even when they want to.
Option C: Continue Co-Owning Post-Divorce
Some couples choose to delay the sale and maintain joint ownership temporarily.
How it works: The divorce decree specifies that both spouses remain co-owners, with one typically living in the home and the other maintaining their ownership interest. The agreement outlines who pays the mortgage, taxes, insurance, and maintenance, and when the eventual sale will occur.
California's Deferred Sale of Home Orders: Under Family Code 3800-3810, courts can order a delayed sale specifically to protect children's interests, typically until the youngest child turns 18 or graduates high school.
Option D: One Spouse Keeps, Other Gets Other Assets
Rather than cash changing hands, one spouse takes the house while the other receives other marital assets of equivalent value, such as retirement accounts, investment portfolios, or other property.
The hidden danger: This is where the "true value" problem becomes critical. A house worth $1.5 million is NOT equal to $1.5 million in a 401(k).
Not sure which option makes sense for your situation?
Every divorce is different. I can help you understand which path forward protects your finances and fits your family's needs.
(213) 444-2225Call or text. Confidential, no pressure.
The Capital Gains Tax Trap
If your Los Angeles home has appreciated significantly, and most have, capital gains tax may be the single largest financial variable in your divorce.
The $500,000 vs. $250,000 Exclusion
Under IRC Section 121, when you sell your primary residence, you can exclude a certain amount of gain from capital gains tax:
- Married Filing Jointly: $500,000 exclusion
- Single or Married Filing Separately: $250,000 exclusion
To qualify, you must have owned AND lived in the home as your primary residence for at least 2 of the 5 years before the sale.
Why Timing Your Sale Matters
Here's where divorcing couples get caught: if you sell before the divorce is final (while still married), you may qualify for the larger $500,000 exclusion. If you sell after, each spouse is limited to $250,000.
Consider a typical scenario: a couple purchased their Pasadena home in 2010 for $600,000. It's now worth $1,800,000. Their gain is $1,200,000.
- Sell jointly before divorce (MFJ): $1,200,000 - $500,000 = $700,000 taxable
- Sell after divorce (single): $1,200,000 - $250,000 = $950,000 taxable per qualifying spouse
The potential tax difference at combined federal (20%) and California (13.3%) rates: $83,000 or more.
If your divorce decree grants one spouse the right to live in the home, the non-resident spouse may still qualify for the residence test. Under IRS rules, the non-resident spouse is treated as using the property as their principal residence during the period the other spouse lives there per the decree. This can preserve both spouses' ability to claim the $250,000 exclusion even after divorce. This must be properly documented in your court order.
The Prop 19 Property Tax Trap
If either spouse is 55 or older, Proposition 19 creates a valuable benefit, and a potential conflict, that must be addressed in your divorce settlement.
How Prop 19 Creates Value
California's Proposition 19 allows homeowners who are 55+, severely disabled, or disaster victims to transfer their property tax base to a replacement home anywhere in California. This can be worth tens of thousands of dollars per year.
Consider a long-owned Pasadena home with a Prop 13 base from a 1990 purchase:
- Current property tax: approximately $2,500/year
- Current market value: $1,800,000
- If that home were reassessed today: approximately $18,000/year property tax
- Annual Prop 19 benefit: $15,500
- Value over 10 years: $155,000+
Here's what most people, including many divorce attorneys, don't realize: only ONE spouse can claim the Prop 19 benefit. Property Tax Rule 462.540(g)(2)(A)(iii) specifies that when divorcing spouses both qualify, only one can use the transfer. And critically, the benefit goes to whoever files first unless it's specifically negotiated and documented in your divorce settlement.
If you don't address Prop 19 in your divorce settlement, either spouse can race to file first, the "losing" spouse has no recourse, and a benefit worth $155,000+ goes to one party without being accounted for in the division.
Understanding the Buyout
When one spouse wants to keep the home, the buyout seems simple: pay your spouse their share of equity, and the house is yours. But the details matter enormously.
Good News: No Immediate Tax on the Buyout
Under IRC Section 1041, transfers between spouses incident to divorce are not taxable events. The buyout payment itself, whether $300,000 or $600,000, is not taxed as income or capital gains at the time of transfer.
The Basis Trap: You Inherit the Tax Liability
Here's what people miss: the spouse who keeps the house takes over the original cost basis. There's no step-up in basis for divorce transfers.
If you and your spouse bought the home for $400,000 and it's now worth $1.4 million, the keeping spouse's cost basis remains $400,000. When they eventually sell, they'll face capital gains on the difference, potentially $1 million in gain, with only a $250,000 exclusion available as a single filer. The departing spouse walks away with cash. The keeping spouse walks away with a deferred tax liability.
Property Tax: The Good News
Unlike the capital gains trap, there's genuinely good news on property tax: buyouts between spouses do NOT trigger reassessment. Under California Revenue & Taxation Code Section 63, transfers between spouses, including divorce buyouts, are excluded from reassessment. The keeping spouse maintains the existing Prop 13 base year value.
The Hidden Value Problem
One of the most expensive mistakes in divorce property division is treating all assets as if they have the same "true value." They don't.
Why Fair Market Value Misleads
Your attorney references "fair market value" because that's the legal standard for property division. But FMV doesn't account for what you'll actually receive after taxes and costs.
| Asset | Gross Value | Embedded Tax | True Net Value |
|---|---|---|---|
| House (high basis) | $1,500,000 | ~$50,000 | ~$1,450,000 |
| House (low basis) | $1,500,000 | ~$250,000 | ~$1,250,000 |
| 401(k) | $1,500,000 | ~$500,000 | ~$1,000,000 |
| Cash | $1,500,000 | $0 | $1,500,000 |
A $1.5 million house is NOT equal to $1.5 million in retirement accounts.
The Prop 13 Base as Hidden Asset
Your low property tax bill isn't just nice to have. It's a quantifiable asset. If you're paying $3,000/year on a home that would be taxed at $18,000/year if reassessed, you have an asset worth $15,000 annually. Over 10 years, that's $150,000 in value that doesn't show up on any standard balance sheet.
The numbers matter more than you might think.
Before you agree to any property division, let's make sure you understand what you're actually getting. A 30-minute conversation could save you hundreds of thousands.
Call or Text: (213) 444-2225Everything we discuss stays between us.
Working with Your Divorce Team
A divorce involving significant real estate requires coordination between multiple professionals. Understanding their roles helps you get better outcomes.
Your Family Law Attorney
Your attorney handles the legal aspects of property division: drafting settlement agreements, representing you in negotiations, and ensuring your interests are protected. They need accurate property valuation from a qualified realtor to negotiate effectively.
About 80% of couples who start the divorce process without attorneys eventually end up getting them anyway. The complexity catches up.
The Mediator (If Applicable)
If you're mediating rather than litigating, a mediator serves as a neutral third party helping you reach agreement. They may ask for market data that both spouses can rely on. A divorce real estate specialist can participate as a neutral expert, providing information to both parties without advocating for either side.
Your Divorce Real Estate Specialist
Not every realtor understands divorce transactions. A specialist brings knowledge of capital gains timing implications, understanding of Prop 19 rules and coordination, experience coordinating with attorneys and courts, appropriate confidentiality practices, and the ability to serve one spouse, both (with consent), or as neutral expert.
When I work with divorce attorneys, communication happens at every step. If there's any hiccup, any disagreement between spouses, the attorneys hear about it immediately. Before we even begin, I try to have a pre-meeting with both attorneys to establish that I'm neutral. I'm not taking sides. My job is to get the home sold for the best price and terms, not to advocate for one spouse over the other.
Frequently Asked Questions
Can I sell my house before the divorce is final in California?
Yes, and it may be advantageous for capital gains purposes. Selling while still married allows access to the $500,000 capital gains exclusion (vs. $250,000 if single). However, both spouses must agree, and proceeds division should be addressed in your settlement agreement. Consult with both your attorney and a tax professional before deciding.
Who pays capital gains tax when selling a house in divorce?
Each spouse pays tax on their share of the gain. If you sell jointly and qualify for the $500,000 exclusion, you may owe no tax depending on your gain amount. After divorce, each qualifying spouse can exclude up to $250,000 individually. The tax liability is typically divided proportionally to proceeds received unless your settlement specifies otherwise.
Does buying out my spouse trigger property tax reassessment in California?
Generally no. California's interspousal exclusion (Revenue & Taxation Code Section 63) excludes transfers between spouses, including divorce buyouts, from reassessment. You keep your existing Prop 13 base year value. You'll need to file the appropriate exclusion claim with the county assessor.
Can both spouses use Prop 19 after divorce?
No. Only one spouse can claim the Prop 19 property tax transfer benefit. Under Property Tax Rule 462.540, the first spouse to file claims the benefit unless otherwise negotiated in your divorce settlement. This must be addressed in your settlement agreement to avoid future conflict.
How long do I have to live in my house to get the capital gains exclusion in a divorce?
You must have owned AND lived in the home as your primary residence for 2 of the 5 years before selling. Special rules may allow a non-resident ex-spouse to qualify if the divorce decree permits the other spouse to reside there. The IRS treats this as meeting the residence requirement.
What happens to property taxes when my spouse moves out during divorce?
Nothing changes immediately. The Prop 13 base remains in place. Reassessment only occurs upon sale or other change in ownership. The spouse who remains can continue benefiting from the existing tax base.
Should I sell my house before or after divorce is final?
It depends on your capital gains situation. Selling before may allow the $500,000 married filing jointly exclusion. Selling after may be necessary for settlement reasons. Calculate the tax impact both ways before deciding.
How is a house valued in a California divorce?
Typically through a formal appraisal determining Fair Market Value. However, true value for division purposes should also consider embedded capital gains, Prop 13 base value, and selling costs, which are factors that affect what you'd actually net.
What is a divorce real estate specialist?
A realtor with specific expertise in divorce-related transactions, including understanding of tax implications, court requirements, working with attorneys and mediators, and managing the unique emotional and legal complexities of selling a home during divorce.
Can my ex-spouse claim capital gains exclusion if they don't live in the house?
Potentially yes. If your divorce decree grants one spouse the right to live in the home, the IRS treats the non-resident spouse as meeting the residence requirement during that period, potentially preserving their $250,000 exclusion.
When to Call a Divorce Real Estate Specialist
You need a divorce real estate specialist, not just any agent, if your home has appreciated significantly and capital gains timing matters, either spouse is 55+ and Prop 19 is a factor, one spouse wants to buy out the other, you're considering co-ownership post-divorce, or there's any conflict or misalignment between spouses about the home.
What to Expect in Your First Consultation
When you first contact me, I need to understand your situation before I can advise you. That means learning about your timeline, your goals, where you and your spouse agree and disagree, and what's realistic given your circumstances.
Both spouses should participate in this initial conversation. Not one choosing and one going along. Both engaged from the start. When couples approach it this way, we get outcomes like the Sylmar townhome that sold $15,000 over asking. When one spouse is dragged along or sabotaging the process, it looks more like the Monrovia situation that never closed.
My Pre-Vetting Process
I don't work with every divorcing couple. Only those who are willing to commit to the common goal, complete my questionnaire process, and participate in making sure we're all on the same page before proceeding. This protects everyone, including you, from wasting time and money on a process that's destined to fail.
Explore Each Topic in Detail
Capital Gains Timing
Before vs. after divorce: which saves more on taxes?
Buyout Tax Implications
What happens to property taxes when one spouse keeps the home
The Prop 19 Trap
Who gets the property tax transfer in divorce?
Co-Ownership Rules
Keeping the house together after divorce
True Value Calculation
Embedded taxes and what your house is really worth
Why Work with a Specialist?
What makes divorce real estate different
Not Sure Which Option Fits Your Situation?
Start a conversation. No pressure. We'll figure out your best path forward together.
Call or Text: (213) 444-2225Both spouses welcome. That's actually how I prefer it.
Disclaimer
The information provided in this guide is for educational purposes only and does not constitute legal, tax, or financial advice. Tax laws and regulations are complex and subject to change. Every divorce situation is unique. Please consult with qualified professionals, including a CPA, tax attorney, and family law attorney, for guidance specific to your situation. Justin Borges and The Borges Real Estate Team are real estate professionals, not attorneys or tax advisors.
