California Divorce and Real Estate: Buying, Selling, and Tax Traps

Limitations on Selling Real Property in a Divorce

The first question parties should consider is whether they are even permitted to buy or sell property during the divorce. Once a case is filed and served, a set of automatic orders—known as Automatic Temporary Restraining Orders, or ATROs—immediately springs into effect.

ATROs restrict the ability to sell or transfer real property except in limited, approved circumstances. Violating ATROs can result insignificant consequences, including sanctions, contempt, breach of fiduciary duty claims, or even forced unwinding of a transaction. By using permissible alternatives, parties can often accomplish necessary transactions while minimizing delay and litigation costs. In nearly every case, obtaining competent advice in advance is far less expensive than fixing a problem after the fact.

What Are the Most Common Restrictions to Consider?

Is a court order required to buy or sell property during a divorce? The short answer is a qualified no. A court order is one option, but written agreement between the parties is often faster and less expensive. Transactions in the normal course of business may also be permitted in limited, fact-specific circumstances, though this exception is frequently misunderstood and should be approached cautiously.

When parties cannot agree on the details of a sale, they are not limited to court intervention for every decision. Agreeing on a neutral third party—most commonly a neutral realtor—can significantly reduce conflict by managing price setting, showings, staging, and offers, and by keeping the divorce dynamics out of the transaction. When properly structured, this approach reduces stress and often increases profitability.

As for buying, note that the ATROs restrict a party’s ability to spend their separate property funds. Separate property funds do not automatically equal permission to purchase real property during a divorce.

Understanding what you can do is only the first step. The next question is whether you should—and what the tax, liquidity, and long-term consequences may be.

Timing Your Purchase or Sale

In addition to procedural limits on when a transaction is permitted, you should consider whether waiting until after the divorce is finalized makes financial sense. Timing can materially affect liquidity, support, and long-term outcomes.

Liquidity is often strained during divorce as spouses divide finances to support two households. Ready access to funds can ease asset division and reduce conflict. Timing also affects support calculations, which are need-based. Significant expenditures that reduce investable assets or materially change housing costs can alter the analysis used in determining support.

Market timing matters as well. Real estate markets are often seasonal. For example, many families avoid moving during the school year to minimize disruption to children, and college-centered markets follow predictable rental cycles. Sellers may benefit from higher-demand periods, while buyers may encounter less competition during off-seasons, even with reduced inventory.

Financial issues are important, but not to the exclusion of emotional and practical realities. While nesting or continued cohabitation may appear cost-effective, few separating couples manage it successfully. More often, it increases conflict and litigation costs. For most divorces, early physical separation reduces friction and supports a more efficient resolution.

Timing is critical. Luckily, in most instances, you can address these issues in advance. Early planning saves money in the long term.

Mortgages and Interest Rates

Closely related to timing is the question of affordability. If you are taking on a new mortgage, changes in market rates, loan type, or loan-to-value ratios can significantly affect your borrowing costs. As a general rule, a one-percent increase in interest rates often results in roughly a 10–13% increase in monthly mortgage payments. The inverse is true as rates decline.

Another common issue is qualifying for a mortgage without a spouse. Even with sufficient liquidity for a down payment, lender approval depends on whether your individual income meets underwriting requirements. Spousal support can sometimes be counted as income, but lenders typically require a valid court order, a history of payments, and sufficient remaining future payments. These requirements should be evaluated early if you need to use support to qualify.

A similar problem we regularly see is removing a spouse from an existing loan. Refinancing often comes with higher interest rates and increased costs. Conversely, remaining on a loan after transferring ownership carries real risk: missed payments by the other party can damage your credit ,and existing loan liability may prevent you from qualifying for new financing. Middle pathways—such as delayed refinances or sale contingencies—do exist, but they depend on the facts specific to your situation.

Tax Implications

Taxes are a critical consideration when buying, selling, or transferring real property during a divorce.

If a property has appreciated, sellers may qualify for the Internal Revenue Code (“IRC”) § 121 exclusion of capital gains—up to $250,000individually, or $500,000 if the sale occurs before the divorce is finalized and the parties file joint returns. This underscores the importance of timing.

Another issue is the mortgage interest deduction under IRC§163. Only homeowners who both pay the mortgage and occupy the residence qualify. Spouses paying a mortgage on a home they no longer reside in may forfeit this deduction. Agreements allocating loan payments should be reviewed carefully.

What about property taxes? Many Californians, who have seen residential prices skyrocket, have heard of Propositions 13 and 19,both now enshrined in the California Constitution. Prop 13 limits annual increases in assessed taxable property value to 2%. Because home price increases in California routinely outpace that cap, Prop 13 provides substantial tax savings. However, selling and purchasing a new home resets the taxable value to fair market value, which can result in a significant tax increase.

Prop 19 allows certain homeowners to transfer that lower tax assessment to a new property, mitigating the tax reset. You might already know about Prop 19, but what you might not be familiar with is determining who can use Prop 19 during a divorce. Some important factors are:

(1)  Whether the marital home is sold or retained (Prop 19 is triggered on sale);

(2)  Whether both parties purchase replacement properties;

(3)  Which spouse purchases the replacement property first; and

(4)  Whether both parties independently meet the Prop 19 requirements.

Although Props 13 and 19 are California specific, other states may offer comparable tax benefits.

Additional tax considerations arise with rental or commercial real estate. Consider, for example, parties who qualify as real estate professionals under the IRC may access enhanced tax benefits, making certain properties disproportionately valuable to one spouse. These tax asymmetries should factor into negotiation strategy.

Ignoring tax implications can lead to substantial value loss, while capitalizing on them creates value. Tax planning can easily save tens of thousands of dollars per year. It should not be an afterthought.

What Happens With the Proceeds From a Sale?

When real property is sold during a divorce, the proceeds are typically divided as part of the marital estate or used to offset other assets. In some cases, however, the proceeds must be held in trust or escrow when the parties cannot agree on allocation.

A frequent point of dispute is whether one or both parties have separate property claims to the proceeds. If a party contributed separate funds toward the purchase of the property, that contribution may be reimbursable—provided it can be proven. Tracing separate property contributions made years earlier is often difficult, and many claims fail due to gaps in documentation. Courts rely on evidence, not assumptions or recollection. Proper guidance on what constitutes adequate proof can mean the difference between losing a claim and recovering a substantial down payment.

There is no single approach that fits every case. Parties who plan early, understand their options, and take a thoughtful, individualized approach are best positioned to protect—and in some cases enhance—their financial outcome.

‍