The focus of this blog in on the community interest in property acquired by one spouse prior to marriage.
CP = community property funds acquired during marriage except by way of gift or inheritance.
SP = separate property funds acquired before marriage, after separation, or during marriage by gift or inheritance.
Example One- Property acquired prior to marriage with principal payments on mortgage from community funds during marriage :
Wanda purchased a house before marriage for $200,000. She took title in her name alone, made a down payment of $20,000 and secured a mortgage loan in the amount of $180,000 for the remainder of the purchase price. Shortly thereafter, Wanda marries Harry and the couple live in Wanda’s home for 10 years. During this time, community funds are used to pay the mortgage, property taxes, and insurance. Title remains in Wanda’s name alone.
Harry and Wanda separate after 10 years. Mortgage payments with community funds (CP) reduced the principal note by $20,000. The fair market value of Wanda’s house at this time is $300,000, the mortgage loan balance is $160,000 and the equity is $140,000. Is the Community entitled to reimbursement and an interest in Wanda’s house for expenses paid with community funds?
The two cases that addressed this issue, Marriage of Moore, and Marriage of Marsden determined that the community acquires a pro tanto interest (proportional share) in the increase in the house’s value. The community interest includes the amount of reduction in the principal loan plus a percentage of the increase in equity during marriage. This percentage is calculated by the ratio of the CP reduction in principal divided by the purchase price.
In this example, the community interest in the appreciation of the house would be $20,000 (CP funds that reduce principal) divided by $200,000 (purchase price), or 10%. That ratio will be multiplied by the amount of appreciation, in this case $100,000. Therefore, the community interest is:
$20,000 (CP funds that reduced principal loan)
+ $10,000 (CP share of increase in equity)
Harry would receive one-half of the community interest, $15,000. Wanda would receive her one-half of the community interest as well, $15,000 plus her separate interest.
Wanda’s separate interest would be her down payment ($20,000) plus the SP interest in the appreciation. The SP ratio would be calculated by adding Wanda’s $20,000 down payment to the $180,000 loan and then subtracting the $20,000 of community funds that reduced the principal and then dividing this amount by the purchase price. Thus, the SP interest in the appreciation would be $180,000 / $200,000 or 90% of the $100,000 appreciation. Wanda’s interest in the house would be $125,000 ($20,000 down payment + $90,000 SP interest in appreciation + $15,000 (her one-half community share).
What if Harry argued that interest payments on the loan and taxes should be considered in addition to payments of principal on the loan?
The Moore case rejected this argument, noting that taxes and interest are expenses, not acquisitions of property.
Example Two- Property acquired before marriage with separate funds with appreciation in value prior to marriage:
Marriage of Moore, as in the first example dealt with a separate property purchased shortly before marriage. Marriage of Marsden dealt with a home purchased by wife some years before marriage. In this example, we will modify the example above in that Wanda purchased a house as her separate property in 1995 for $200,000 and made a $20,000 down payment. She secured a mortgage loan for the $180,000 balance of the purchase price.
Harry and Wanda marry in 2005. Between 1995 and 2005, Wanda reduced the principal by $50,000 and the house appreciated in value to $400,000. Between 2005 and 2015 community funds reduce the principal loan by $20,000. Also during this time the real estate market experienced a substantial correction, followed by several years of appreciation. Harry and Wanda separate in 2015. At this time, the property has appreciated to $500,000 ($100,000 increase above the value at the date of marriage.) The balance on the loan at the time of separation is $110,000.
In this scenario, the payments to the loan prior to marriage ($50,000) as well as the increase in the value prior to marriage ($200,000) would be Wanda’s separate property.
The community interest would be calculated the same as above, $20,000 (CP funds that reduce principal) divided by $200,000 (purchase price), or 10%. However, that ratio will be multiplied only by the amount of appreciation during marriage ($100,000). The $200,000 appreciation between the time Wanda purchased the house and the date of marriage remains her separate property. Therefore, Wanda’s separate property interest would be:
$20,000 (SP down payment)
+ $50,000 (SP funds that reduced principal prior to marriage)
+ $200,000 (appreciation in value prior to marriage)
+ $90,000 (SP share of increase in value during marriage)
Wanda would also receive one-half of the community share of reduction in the principal loan during marriage and community share in the appreciation during marriage. Her one-half CP interest would be $15,000.
Thus, in this scenario, Wanda’s share of the $390,000 equity in the house would be $375,000 and Harry’s share would be $15,000.
What if you do not know the fair-market value of the house at the date of marriage?
This can be determined by any reputable real estate appraiser. Generally, the parties will stipulate to one appraiser and each pay one-half of the fees. Under the facts of scenario #2, the parties, or their attorneys, would ask the appraiser to complete two separate valuations: (1) current fair market value; and (2) historical appraisal at the date of marriage.
Are post-separation mortgage payments included in the community interest calculation?
Let’s say that Harry moved out of the residence after the parties separated and Wanda continued to live in the house for 5 years pending trial. Wanda paid the mortgage from her post-separation income and reduced the principal on the loan $20,000 during this period. At trial Harry argued that the community should continue to increase during the post-separation years just as if community funds had been used to pay down the mortgage.
Marriage of Mohler (2020) 20 DJDAR 3432 held that the community only accumulates interest in a separate property residence when community funds are used to pay down the principal of the loan. Therefore, Wanda’s payments post-separation and any post-separation appreciation of the property does not increase the community interest.