GENERALLY, in California, property acquired by a spouse prior to marriage is considered separate property under family code section 770 while those acquired after marriage are considered community assets under family code section 760. How do you characterize real property purchased prior to marriage but with the mortgage principal paid down using community income or funds during the marriage? The community in this situation acquires a pro tanto interest in the ratio that the payments on the purchase price made with community funds bear to the total payments on the purchase price and any appreciation should be apportioned accordingly. Marriage of Moore (1980) 28 C3d 366, 371, 373, 168 CR 662, 664, 665. Other expenses associated with the property are not considered in the calculation such as mortgage interest, taxes, and insurance. In essence, the real property would accumulate both a separate property and a community property component by the date of separation. The appropriate remedy in this situation where separate property is subsequently paid with community funds is “apportionment.”
The process of apportioning between the separate and community property component is laid out in the Marriage of Marsden. In that case, the court determined the ratio or percentage in which the mortgage loan principal was reduced during the marriage and applied that percentage to the appreciation of the real property during the marriage. The community property component would then consist of the reduction in the mortgage loan principal during the marriage plus the portion of appreciation during the marriage applying the ratio discussed above.
In the Marriage of Marsden, the real property was purchased by the husband for $38,300 prior to the marriage. The original mortgage was $30,000. By the time the husband got married, the house was now worth $65,000 while the mortgage has gone down by $7,000. Both the appreciation of $26,700 and the mortgage reduction of $7,000 would be separate property since it occurred prior to marriage. Marriage of Madsen (1982) 130 CA3d 426, 181 CR 910.
During the marriage until the time of trial, the property has appreciated another $117,500 (property now valued at $182,500) while the mortgage has further declined by $9,200 up to the date of separation. The ratio at which community funds paid down the mortgage ($9,200) during the marriage to the original purchase price ($38,300) amounts to 24.02%. This percentage of the property appreciation during the marriage of $117,500 ($28,223.50) plus the reduction in mortgage balance during the marriage ($9,200) would constitute the community component of the real property. The rest was the husband’s separate property. The husband in that case was awarded his separate property component of the real property plus one half of the community property component.
The Marsden apportionment method is also applicable to situations where a community real property is later transmuted into one spouse’s separate property through execution of a quit claim by the other spouse but is subsequently paid using community funds. Marriage of Broderick (1989) 209 CA3d 489, 257 CR 397. In litigation, the community interest in the situations mentioned about is proven through expert witness testimony typically by a forensic CPA.
Since California case law allows the creation of a community interest in real property acquired prior to marriage, one has to consider vehicles to protect themselves if you own property and you are contemplating of getting married. There are several ways of avoiding the creation of a community interest on your separate real property. One, you can sign a prenuptial agreement. Two, the parties can execute a postnuptial agreement if the parties are already married. Three, the parties can execute a transmutation agreement with a waiver of any family code section 2640 reimbursement claim. If your divorce case involves complex issues of asset distribution, it is best to retain the representation of competent counsel.
* * *
Please note that this article is not legal advice and is not intended as legal advice. The article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article does create any attorney client relationship between you and the Law Offices of Kenneth U. Reyes, P.C. This article is not a solicitation.
* * *
Attorney Kenneth Ursua Reyes is a Certified Family Law Specialist. He was President of the Philippine American Bar Association. He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, P.C. is located at 3699 Wilshire Blvd., Suite 747, Los Angeles, CA, 90010. Tel. (213) 388-1611