Here are some options to discuss with your accountant or trust lawyer:
Assuming you quitclaim for no money (a gift), her basis in the property is the same as your basis. You may have to pay a gift tax or at least fill out IRS form 709, deducting the value of the house (less $10k)from the unified credit amount ($650k right now) your estate can claim when you die.
Alternatively, you can gift her (and $10k to each kid) $10k in equity in the house each year and let her live in it. She becomes a tenant in common with you and can sell her share of the house at any time.
A 3rd way would be to sell her the house at fair market value using owner financing. You use the $250k exception to exempt the house from capital gains tax. She pays you the mortgage, which you promptly give back to her (the $10k gift/year), and your capital gains over $250k are spread out over the term of the mortgage. This is done to avoid pushing you into a higher tax bracket. This kind of transaction is forbidden between family members, but you can sign the tax forms with a clear conscience because you're divorced. Isn't this a fine way to encourage people to stay married?
The easiest way to do this is to sell the house, take your $250k exemption, and invest the money, using it to pay child support, take out educational IRAs for the kids, or ROTH IRAs.
You only get to claim the $250k exemption if you were an owner of the house for at least 2 of the last 5 years and lived in it for at least 2 of the last 5 years. Ownership and living there don't have to occur during the same 2 years.
NOTE: There will also be CA tax consequences of your actions. Ask the accountant/attorney about these too.
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This is not legal advice and you are not my client. Double check everything with your own attorney and your state's laws.
