What Happens to the House in Divorce?
Tessa James is a Divorce Coach and licensed Real Estate Agent. Read here for details on how her unique overlap of expertise can help you, and listen to EPISODE #3 of Unhitched But Not Unhinged for more.
There are three basic options for dividing a community property house in a California divorce:
a buyout
an immediate sale
a deferred sale
Let’s look at each of these in turn.
Spousal Buyout
If you have enough assets besides the family home, one of you may decide to take full ownership of the property and pay the other spouse for their share—an arrangement usually known as a buyout. Here's how it works:
Valuation. First, you'll need to agree on what the house is worth. You might agree to use an estimated value from a realty website or a local realtor. Or you could hire a professional appraiser to determine the current fair market value of the property.
Equity. Then, you determine how much equity you and your spouse have in the property by subtracting what you owe on the mortgage from the current value. For example, if your community property home is currently worth $1 million and you still owe $600,000, the total equity is $400,000.
Buyout amount. Because community property is split equally in a California divorce, the spouse who's buying out the house will need to pay the other spouse 50% of the equity, plus any reimbursements for the other spouse's separate property contributions.
Particularly in the California housing market, many people will find it difficult to find the money to pay their spouse half of the equity on a home. But remember that you don't have to pay your spouse in cash. Other options include:
Trading other assets (such as retirement accounts) to balance out the overall property division
Refinancing
Often, you will need to refinance to remove your spouse from the mortgage. However, there are serious financial hurdles to taking out a new loan for a buyout. In addition to finding enough assets for a buyout, you'll need to consider whether you can handle the ongoing costs of keeping the house, including mortgage payments, insurance, and property taxes. You should also speak with a tax consultant to learn about the tax consequences of a buyout.
Immediate Sale
You may agree (or the judge may order you) to sell the family home and split the profits from the sale. This is often the only feasible option when neither of you is in a financial position to buy out the other. If your home is "underwater"—meaning you owe more on the house than it can be sold for—you and your spouse will share equally in the loss.
California judges may order a deferred sale of the family home in order to allow the custodial parent to stay there with the children, but they must first determine whether it would be economically feasible.
Deferred Sale
In some situations, it may make sense to continue to co-own the family home after the divorce and sell it at a later date. For example:
Couples (or the judge) may decide this is the best way to minimize the impact of the divorce on children, by allowing the kids to stay where they've been living and giving the custodial parent exclusive use and possession of the home for a certain period—such as until the children move out or are old enough to handle the stress of a move.
You might decide on a deferred sale for financial reasons, such as when it's a bad market for sellers or interest rates are particularly high.
California judges may order a deferred sale of the family home to allow the custodial parent to stay with the children. Still, they must first determine whether it would be economically feasible considering the custodial parent's income, the availability of child support and spousal support, and any other sources of funds to make the mortgage payments.
If a deferred sale is economically feasible, the judge will also consider the following circumstances before making a decision:
the children's ages and school grades
how long the kids have lived in the home
how close the home is to the children's school, child care, and other services
the potential emotional impact of a move on the children
whether the home has been modified to accommodate a child's or the custodial parent's physical disability
how much the home's location allows the custodial parent to keep a job
each spouse's financial ability to find suitable housing
the potential financial hardship of a delayed sale for the parent who won't stay in the house (sometimes called the "out-spouse")
the tax consequences for each spouse of a delayed sale
any other factors that are relevant and fair to consider
For a full break down, read Cal. Fam. Code §§ 3801, 3802 (2023)
Reimbursement Issues Related to the Family Home
Whatever happens to the family home in a divorce, one of the spouses may be entitled to reimbursement in the following situations:
Community funds paid for separate property: If a couple used community property funds to make mortgage payments or improve a home that belongs to one spouse as separate property, the other spouse has acquired an interest in the home. As part of the divorce, the couple (or the judge) will use a formula to calculate the amount of that interest to reimburse the non-owner spouse.
Mortgage payments after separation ("Epstein credits"): Under California law, judges may order reimbursement for a spouse who used separate property funds to pay the mortgage on a community home after the date of separation and before the divorce, unless it would be unfair and unreasonable. (Cal. Fam. Code § 2640 (2023); In re Marriage of Epstein, 24 Cal.3d 76 (1979).) For example, a judge won't order reimbursement if the spouses agree there will be no reimbursement, the payments were intended as a gift, the spouse making the payments continued to live in the home, the payments were not substantially greater than the rental value of the home, or the payments were made instead of (or as a form of) spousal support.
Exclusive use and possession of the family home after separation ("Watts charges"): When one spouse moves out of the family home during the divorce, the judge may order the spouse who stayed in the home to pay the other spouse for the fair rental value of the home during that time. (In re Marriage of Watts, 171 Cal.App.3d 366 (1985).)
What Now?
Navigating the needs of your Real Estate in a divorce is a complicated process. To help you better understand the process, I have two more resources to share with you.
How to divide the family home during divorce
Community property laws of California explained
Email me at Tessa@trustintessa.com for the resources. And if you’re facing questions about your real estate in your divorce, sign up now for a Free Discovery Session.
