Why Understanding the Difference between Separate Property and Community Property Can Mean the Difference between a Favorable Outcome and Financial Ruin

Husband bought his home in San Jose in 1993. He bought it together with his parents. Husband and parents used their money for the down payment. Husband and parents were on title to the home. Husband got married in 2001. His San Jose home significantly grew in value from 1993 to 2001. Husband refinanced the loan a few months after he got married and added wife to the loan and to the title. The title to the home was held by husband, wife, and husband’s parents as of 2001. Husband and wife separated in 2013. Between 2001 and 2013, the house grew in value even more. Husband thought that because wife was now on title, she was entitled to half of the equity that was accumulated from 1993 (date of purchase) until 2013 (date of separation). However, with the sound advice of a San Jose divorce lawyer, husband was able to keep his home and negotiate a fair buy-out.

The following principles are important to understand when dealing with “mixed property”—property that is part “separate” and part “community.” California Family Code section 760 reads: “Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.” California Family Code section 770 reads: “(a) Separate property of a married person includes all of the following: (1) All property owned by the person before marriage; (2) All property acquired by the person after marriage by gift, bequest, devise, or descent; (3) The rents, issues, and profits of the property described in this section. (b) A married person may, without the consent of the person’s spouse, convey the person’s separate property.”

Another family code section that came into play here was Family Code section 2640, which reads: “(a) Contributions to the acquisition of property,” as used in this section, include downpayments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property but do not include payments of interest on the loan or payments made for maintenance, insurance, or taxation of the property;(b) In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division;(c) A party shall be reimbursed for the party’s separate property contributions to the acquisition of property of the other spouse’s separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.” Family Code section 2640 is very important when we are dealing with “mixed” property.

Now, let’s apply these principles to this case. Husband purchased the home before he got married. Husband made a down payment with the money he earned before marriage. The down payment was husband’s separate property. Part of the equity husband acquired in the home from 1993 until 2001 was his separate property. To figure out the husband’s separate property interest, we looked up the property values in the loan documents related to the purchase in 1993 and the refinance in 2001. The home was appraised at the time of purchase and at the time of the refinance, and, luckily, the appraisals were not lost. This also speaks to the importance of keeping all loan documents when you buy or refinance. Next, we had to figure out the present value of the home, which we did by ordering an appraisal. Wife’s interest was determined as follows. First, husband’s separate property claim under section 2640 was calculated. Second, the equity of the property was determined by subtracting the mortgage balance from the appraised value. Third, the total equity was divided by half since husband and wife were 50% owners and husband’s parents were 50% owners. From the equity that husband and wife owned, we subtracted husband’s section 2640 claim. The result was the “community” equity. Husband and wife were entitled to half of the community equity. This is how husband was able to negotiate a buy-out and keep his home. When you are dealing with “mixed” property, advice of a San Jose divorce lawyer who is experienced in dealing with these issues is critical. This is how understanding the difference between separate property and community property, with the help of a San Jose divorce lawyer, can mean the difference between a financial ruin and a favorable result.

It would have been a good idea for husband and wife to sign a prenuptial agreement before husband added wife to the title. But, in this case, it did not happen. Getting a prenuptial agreement is a very personal matter, and the decision to enter into one is driven by personal and cultural values. In this case, husband would have sold his home and paid wife $150,000 had it not been for advice of a San Jose divorce lawyer and a forensic accountant who traced husband’s downpayment to a separate property source and calculated husband’s Family Code section 2640 separate property reimbursement claim. Because husband could prove his section 2640 separate property reimbursement claim, wife received $60,000 as opposed to half of the total equity. This case is an example when hiring an expert was necessary and justified in terms of cost and the outcome achieved.

If you are going through a divorce and you owned real estate before you got married, it is important that you consult with a San Jose divorce lawyer about property division. Understanding separate property reimbursement claims is critical to keeping your property and to your success.


Written by Ekaterina Berman, a San Jose divorce and family immigration lawyer. My goal is to provide caring and experienced representation in family law matters to every client. 

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