A common issue that comes up in California divorce cases is what happens to property owned by one spouse prior to marriage. It is a common misconception that upon marriage, all marriage property becomes community property. This is not true. Under California law property owned prior to marriage is that spouse’s separate property. However, circumstances can change during marriage, which could cause the community to acquire an interest.
Scenario One: The Moore/Marsden Rule
Jack owns a house prior to marriage. Jack and Jill marry, live in Jack’s house during marriage, pay all monthly mortgage payments from community income, and make improvements on the house during marriage. After twenty years Jack and Jill get divorced.
This is very common in California divorce cases. When this occurs, the law recognizes that the community has acquired an interest in the home. The idea is that joint funds are being used to benefit a separate property interest, i.e., the separate property equity. It does not matter if the mortgage payments came from Jack’s income. Absent a pre-marital agreement to the contrary, Jack’s income is community income, i.e., joint income. The formula for apportionment is that the community acquires a pro tanto (dollar for dollar) interest in the ratio that principal payments on the purchase price made with community property bear to payments made with separate property. Hence, any increase in value (appreciation) must be apportioned accordingly between the separate property and the community property estates upon separation or dissolution. This rule is known as the Moore/Marsden rule.
Scenario Two: Transmutation
Jack owns a house prior to marriage. During marriage Jack adds Jill to the title.
This is also a very common scenario. It usually happens when the property is being refinanced. This is called a transmutation. Family Code section 2581 creates a presumption that property which is acquired in joint names during the marriage is community property. Jack’s house is now community property. Jack would, however, have a right to be reimbursed for the equity in the home at the time of the transfer. Family Code Sec. 2640 requires that traceable separate property contributions to the acquisition of community property must be repaid from the value of the asset before any remaining community property equity can be found to exist and hence be subject to division. So if the value of the home at the date of transfer was $100,000 [value meaning fair market value – total debt], upon divorce and sale, Jack would be entitled to $100,000 off the top before the remaining proceeds are divided.
Jack may also have a claim that the transfer of title to the community itself was not valid under the California fiduciary duty rules. This is because a transmutation (adding a spouse to the title of what was previously separate property) must be free and voluntary, and there is a presumption that the spouse who comes onto the title did so through some form of undue influence. This is a very fact-intensive inquiry.
Scenario Three: Family Code 2640
Jack owns a house prior to marriage. Jack and Jill marry, live in Jack’s house for several years, and during marriage, pay all monthly mortgage payments from community income and make improvements on the house during marriage. Years later, Jack refinances and adds Jill’s name to the title as part of the refinance.
In this scenario the community property would acquire an interest for the period from the date of marriage, until the refinance based on the principle paydown as described in Scenario One. Upon refinance, the house would become community property, but Jack would still have a separate property Family Code 2640 reimbursement claim for the value of his separate property contribution as described in Scenario Two.
Scenario Four: Family Code Sec. 770
Jack and Jill both own separate homes prior to marriage. Jack and Jill marry, live in Jack’s house during marriage, pay all monthly mortgage payments from community income, and make improvements on the house during marriage. Jill rents her property and pays mortgage and improvements from the rental income.
This scenario is the same as Scenario One above, except Jill owns a separate home that is being rented out. In this scenario, Jack’s home would be treated just the same as in Scenario One upon divorce. Jill’s home would remain her separate property. Under Family Code Sec. 770, not only is all property owned prior to marriage separate property, but also the rents from said property are separate.