PROPERTY DIVISION – HOUSE
What will happen to your house in your divorce? The answer is it depends. Your house is one of the most valuable and important assets in your divorce. The purpose of this article is to provide you with some insight into how courts determine the division of a residence in a divorce. Each case has its own facts that affect the outcome of the division of this asset in a divorce. The information in this article is not intended to be, nor should it be interpreted to be, legal advice as to your house and your divorce. The information in this article is provided for informational purposes only. This article should be considered a starting point from which you compile facts and supporting documentation and then seek the advice of a family law legal professional to determine your rights in the division of your house in your divorce.
Generally, community property is everything acquired during the marriage from the date of marriage to the date of separation except a gift or inheritance. Separate property is property owned before marriage or acquired after separation. A gift or inheritance is separate property no matter when received.
The first step in the division of assets is “characterization.” Characterization of property is determining whether property is community property or separate property. Characterization of the property as community or separate, valuation of the house at different events in time, how the title is held, any changes (transmutation) of ownership in the residence, tracing of the source of funds used to pay the down payment and the property’s mortgage payments, etc., are the elements of this analysis. Transmutation of an asset is to change its character from community to separate or from separate to community. This article presents different fact patterns that are common in dealing with houses in divorce. This discussion applies specifically to California law.
1. In this first scenario, the parties married, worked, and saved during their marriage, and then bought their house during their marriage using the money they saved as their down payment. All payments on the mortgage during their marriage were made from their community property earnings. “during their marriage” means from the date of marriage to the date of separation. This house is 100% community property and each party is entitled to an equal share of its equity.
2. Assume the same facts as above, but Party 1 (P1) moves out of the house at separation and Party 2 (P2) continues to live in the house and pay the mortgage from P2’s post-separation separate property income. Because P2 has now reduced the mortgage’s principal with P2’s separate property income, this has created a separate property interest in the property, reducing the community property share of each party.
3. Another common scenario is when they use one of the parties’ separate property for the down payment on the house they purchase during the marriage. That could be in the form of a party’s savings acquired before the marriage, a gift to the party from parents to buy a house or an inheritance. Using the separate property savings, gift, or inheritance of one party as the down payment on their house creates a separate property interest in the house, reducing the community property share of each party.
4. A more complicated scenario is when P1 owns a house before the parties marry. P1 has paid the down payment for the house and paid down the mortgage principal from P1’s separate property income prior to marriage. P1 and P2 marry, live in that house and pay the monthly mortgage from their community property income earned during the marriage. They separate after a number of years, P2 moves out and P1 continues to reside in the house from the date of separation to the time of trial. The court must determine each party’s percentage share of the equity in the home. P1 must be compensated for the percentage of the investment in this home that reflects his down payment, the principal he paid down on the mortgage before the marriage, and the mortgage principal after separation until time of trial from his separate property income. The community’s percentage interest in the appreciation of the house’s equity must also be allocated. It is based on the relationship between the amount the community paid down the mortgage’s principal during marriage to the total investment in the house including the down payment and the total community and separate property paydown of the mortgage.
The calculation of each party’s interest in the house is determined by the Moore/Marsden calculation. This calculation is named after the California cases In re Marriage of Moore (1980) and In re Marriage of Marsden 91982), which emphasized the importance of fairness and equity in dividing marital property. The cases established that the community in a marriage may receive a percentage of the premarital asset’s appreciation. The house will be valued at the time of trial to determine the extent of appreciation.
For purposes of trial of this issue, the house must be appraised at the date of marriage and the date of trial. The value of the house at the date of purchase is the amount of the down payment plus the purchase money mortgage. Moore/Marsden calculations are complicated and your appraisals and your documentation of the amounts paid from separate or community sources from date of purchase to date of trial are required to demonstrate to the court the appropriate allocation of the equity in the house to each party. Parties often disagree with the underlying facts and valuations.
There is also a recent case with this same fact pattern, but the court of appeals added an additional nuance to this Moore/Marsden divorce. Because the community’s share of the equity was significant and one of the parties continued to live in the residence for some time before the parties’ interests were actually divided, the court of appeals held that the party remaining in the residence (the “in-spouse”) additionally owed the other party (the “out-spouse”) interest on the out spouse’s share of the community equity in the home from the time the out-spouse moved out until the time of trial because the in-spouse was essentially using significant community money invested in the house for his sole benefit.
The calculations do not include interest, insurance, or taxes paid by either party because none of these expenses contribute to the capital investment. What is important is the percentage of the mortgage principal paid down by the community on this separate property asset. Expenses for maintenance of the property also are not included for that same reason. However, if major improvements were made to the property, such as enlarging the house by adding a bedroom, thereby increasing the value of the house, that must be factored into the calculations.
DOCUMENTATION: Many additional facts can affect the calculations of each party’s percentage interest in the equity in the home in each of the above examples and make it more complicated to determine the extent of each party’s interest. Examples of such factors are the effects of refinancing one or more times, title changes, and home improvements made with community funds or a party’s separate property funds. Major improvements made to the property before, after, or during the marriage, such as adding a bedroom that increases the value of the house should be included in the calculations. Parties may disagree with the valuation of the house and whether or to what extent any improvements have enhanced the value of the house.
The variations of what can happen to change the results in each of the above scenarios are endless and affect the interests of each party in the residence. Parties must also retain deeds, escrow instructions and documents, refinance documents, and records to trace the source of payment of the down payment and mortgage payments, and any improvements throughout the years (such as bank statements, credit card statements, receipts, etc.). They are necessary to prove each party’s percentage share of the equity in the residence. Those original records should be stored in a place secure for all time because it may be 5, 10, 20, 30, or more years after the house is purchased, refinanced, improved, etc. when you must prove the facts regarding its purchase, trace the payment of mortgage payments, etc., in your divorce, or, if you do not divorce, possibly in probate court. Failure to have that documentation may mean you may not be able to prove your case at trial. It is recommended that the original documents be retained and security stored, but that they also be scanned and stored indefinitely in cloud-based storage.