How Capital Gains Tax Impacts Property Division in A Divorce in California 2025

The administrative aspects of a divorce are already complex, but can become even more complicated when potential capital gains taxes are involved. Capital gains occur when you receive more money for the sale of something than you paid for it, and then must pay a tax on that extra money. When it comes to asset division, it’s important to understand how capital gains tax affects property division in a divorce in California.

Divorce Statistics in California

While California may have one of the lowest divorce rates in the country, as of 2022, it still hovered around 5.88 divorces per 1000 people. At the same time, they have a higher median net worth than 60 percent of the nation, making property division during divorce a potentially complex issue. During such a stressful time, tax concerns may not be the first thing on your mind, but they probably should be near the top.

Understanding The Division of Property and Capital Gains Tax in California Divorces

When you divorce in California, you and your spouse must divide all marital assets and debts that were acquired. You can either work together to create an agreement on how the property will be divided, or you must go through litigation to have a local judge make a decision on your behalf. Marital assets can include anything from your family home to a 401K, pension, car, or even furniture.

California divides your property into two categories:

• Community property, which is property you collect and own with your spouse during the marriage
• Separate property, which is property you collected and owned before the marriage or after you separated

Selling Your Home After a California Divorce

The way your property is divided in a California divorce can affect the amount of taxes you owe in the current year or the next one. California does not tax capital gains at a lower rate, but rather counts them as ordinary income and taxes them that way. The federal government, however, allows you to exclude up to $250,000 from the sale of a home if you are filing single, or up to $500,000 if you are filing jointly.

Whether you sell your home or refinance to allow one spouse to occupy it will also affect your taxes. If one spouse transfers the home to another spouse, there is no federal capital gains tax incurred at that time. However, if the current owner then sells the home, they will solely incur the capital gains tax. A skilled property division lawyer from our firm helps you calculate this into asset division.

More importantly, when you sell your house, it may impact whether you pay a larger tax amount or are able to capitalize on deductions. Because California capital gains laws consider capital gains to be income, and California has a progressive tax, you’ll want as many exemptions as you can possibly get. Selling your home while you are still married often allows you to maximize the exclusion for federal taxes.

Hire a Property Division Lawyer to Protect Your Interests

Because the division of property may impact the capital gains tax you pay, hiring a property division lawyer before you divide your marital assets is crucial. An experienced property division lawyer can help you make sure there are no hidden assets, such as hidden bank accounts or pensions, and ensure you receive what you’re entitled to. At the Law Offices of Rod Firoozye, we work tirelessly to ensure your assets stay protected during a California divorce.

FAQs

Are Capital Gains Taxed in a Divorce in California?

Whether or not capital gains are taxed in a California divorce depends on several factors. Since California is a community property state, which means assets acquired during the marriage will be split as equally as possible, whether you pay capital gains tax will depend on how the property is being distributed, the amount of gains, if the capital gains are more than the federal exemption, and how the gains were determined.

Is It Bad to Move Out During a California Divorce?

Moving out of your family home during your divorce may lead to more issues or cause you more financial burdens than necessary. It can also negatively affect financial negotiations during property division or give you a weaker position in property disputes. If children are involved, it may also reflect a less stable environment. You should discuss your situation with a lawyer to ensure you are taking steps that will not negatively impact your divorce decree.

How Does Capital Gains Tax Work in a California Divorce?

The capital gains tax in a California divorce is only implemented when certain assets are sold. In California, the transfer of the family home from one spouse to the other does not incur a capital gains tax at the time of divorce. However, if the spouse who keeps the house sells it, they must use the original sale price as the basis for their capital gains tax at that time. This is called a deferred capital gains tax.

Do I Have to Pay Capital Gains Tax on My Divorce Settlement?

While in most cases you do not have to pay capital gains tax on your divorce settlement at the time of divorce, if the settlement includes assets that have appreciated greatly in value since purchase, you may want to factor in capital gains tax at the time of sale into your settlement. Hiring an experienced property division lawyer is an important step in making sure you’re not responsible for capital gains tax later.

Your Dedicated California Divorce Team

The team at the Law Offices of Rod Firoozye has worked in Silicon Valley since 1996, starting in downtown Palo Alto and then branching out to San Jose. Since 2004, we’ve exclusively assisted clients with complex family law matters, including high asset property division and child custody disputes.

We have extensive experience navigating complicated divorces, and we work to ensure our clients have a strong understanding of how capital gains taxes will impact them before and after their divorce. Contact us today for help with property division in your divorce.