Dividing Real Property in divorce can be one of the most contested and litigated issues. The acquisition of property (down payment and reduction of mortgage principal) with both community and separate funds often creates complex tracing and characterization issues at trial. This is the first in a series of blogs in which I will address both common and unique issues parties can face when dividing the marital residence. Aside from contested custody disputes, the marital residence is perhaps the most emotionally driven issue in a divorce. To start, I will follow Harry and Wanda through a series of acquisitions and transfers of property before and during marriage and after separation. The first two scenarios fall under bright-line rules for characterization and division of real property.
Example One- Property acquired during marriage with all Community Funds :
Henry and Wanda marry in 2005 with little funds in either parties’ separate checking accounts. They open joint checking and savings accounts and deposit their paychecks into this account. Within two years they have saved enough money for a down payment on a house. In 2007, Henry and Wanda purchase house with a $20,000 down payment from their joint savings account. For the next ten years, mortgage payments are made from the same joint accounts. No other funds are used to pay down the principal balance on the mortgage.
In 2017 the couple separates and file for dissolution of marriage. They agree to list the house for sale and divide the net proceeds equally. This follows Family Code §760 which provides that all property acquired during marriage is community property. Only community funds were used for the down payment and reduction of the mortgage. Therefore, the house and any net proceeds from the sale (after real escrow fees, commissions, and other seller’s costs) should be divided equally.
Example Two- Property acquired before marriage with separate funds:
Henry owns a house prior to marriage. The couple decides to purchase a house together and rent Henry’s house. They never live in Henry’s house after the date of marriage. All rent proceeds are deposited into a separate bank account in Henry’s name and all expenses for maintaining Henry’s house are paid from this account (mortgage, taxes, insurance and maintenance). No community are funds are deposited into this account, and no community funds are used to improve his property. Ten years later the couple separates and Wanda claims that she should receive a share of the increased value in Henry’s house during marriage and a share of the net rental proceeds that remain in Henry’s bank account at the date of separation. Wanda will lose this argument. Family Code §770 provides that all property owned before marriage, and all property acquired after marriage by gift or inheritance are the separate property of the acquiring spouse. This includes any rents, profits, or increase in value of the property. Because no community funds were used in the acquisition, improvement or reduction of mortgage during marriage, the rental property and any profits there from remain Henry’s separate property. (Note: any net profits would be income to Henry for the purpose of determining child support and/or spousal support.)
In the next blog I will discuss how the community acquires an interest in the separate property of one spouse when community funds are used to pay down the mortgage and/or improve the property.
Do you want to hear more about the latest information on family law? If you have questions regarding real property as it relates to divorce, please contact our office to schedule a consultation. The Law Office of Family Law Attorneys Bawden & Kochis handle legal issues regarding child custody & visitation, adoption, annulment, mediation, domestic violence, child and spousal support as well as pre and post-marital agreements. Telephone (909)792-0222, or email us at [email protected]