Many married couples have purchased a home during their marriage. Presumptively, the home, since it was acquired during the marriage, is community property, and, in the event of the divorce, each spouse has an equal interest in the home. However, there are frequently twists and turns with facts and law that affect the spouses' respective interests in the home.
When an Inheritance Was Used to Purchase the Home
For example, while the home may have been purchased during the marriage, one spouse may have made the down payment with an inheritance, or savings he or she acquired prior to marriage. Savings earned prior to marriage are the separate property of the spouse who earned it. An inheritance is always separate property regardless of when the spouse received it (unless the inheritance was to both spouses, not just one). So, if a spouse uses his or her separate property for the down payment on a home purchased during the marriage, then the home is still community property, but pursuant to Family Code Section 2640, the spouse who made the down payment is entitled to have his/her separate property reimbursed first from the equity in the home.
After the reimbursement is made, then the remainder of the equity is split 50/50. Sometimes, there is no remainder. Other times, there isn't even enough money to fully reimburse the spouse who made the separate property down payment. In such an event, the spouse who made the separate property down payment gets paid first, and if there isn't enough equity in the home, that is all he/she will get for his/her reimbursement. He/she can't get the remaining balance of his/her reimbursement from another asset.
To illustrate, suppose that Husband and Wife get married. Wife then inherits $100,000.00. Husband and Wife then purchase a home, and Wife uses her $100,000.00 inheritance for the down payment. Over the next few years, the home then appreciates in value so the home now has $150,000.00 in equity. Husband and Wife then file for divorce, and they agree to list the home for sale. Wife will get her $100,000.00 back as a separate property reimbursement. The remaining $50,000.00 is community property and is split equally between the parties, so $25,000.00 to each spouse. Alternatively, Wife might be able to buy out Husband's interest in the house by paying him $25,000.00, and then keep the house for herself.
However, suppose the home depreciated in value, so the equity in the home at the time of divorce is only $80,000.00. Wife will only be entitled to get $80,000.00, and the remaining $20,000.00 of her inheritance that she used for the down payment is lost for good. She can't try to collect it from another community asset. Meanwhile, Husband will get nothing.
It's also important to note that Wife must be able to prove that she used her inheritance for the down payment on the home in order to get her separate property reimbursement. Sometimes, proving it is very easy: Wife received her $100,000.00 inheritance, and kept it in a bank account only in her name. Then, a month after she received her inheritance, she wrote a check directly from her bank account to the seller of the home. That's pretty easy.
Whose money was used for the purchase?
However, it doesn't always work like that. Suppose Wife took her inheritance, and then put it into a bank account in both her and Husband's names. They don't purchase a home until a few years later. Meanwhile, both Husband and Wife are working, and put their paychecks in the very same account with the inheritance. They are now commingling their community asset paychecks with Wife's separate property inheritance. Over the next couple of years, they sometimes spend more per month from this account than they deposited with their paychecks, and sometimes less. Consider the following:
- At some point in time, the bank account balance is reduced to $60,000.00, and then through frugal spending, they save money and increase the balance to $75,000.00.
- Then Husband then gets a big bonus from work of $30,000.00 which he deposits into the bank account, so now the balance of the account is $105,000.00.
- Finally, they purchase a home, and use $100,000.00 for the down payment.
Is the $100,000.00 from Wife's separate property, or is it from a combination of her separate property and community property? It's not as clear cut as in the first example, where Wife kept her inheritance in her own separate bank account, and then they purchased the home a month later. In this case, Wife will likely have to hire a forensic accountant to prove that the $100,000.00 came from her inheritance. This process is called 'tracing.' To be honest, in this example, Wife's separate property interest can be no more than $60,000.00 because the balance of the account after Wife deposited her inheritance was reduced down to $60,000.00 at one point, meaning that at least $40,000.00 of her inheritance must have been used for other expenses. However, Wife's separate property reimbursement right might even be less.
When One Spouse Owned the Home Prior to Marriage
At other times, the spouses continue to live in a home owned by one of the spouses prior to marriage. So, for example, suppose Husband owns a home prior to marriage, and he and Wife then get married. She then moves in with him (they were probably living together before marriage, but let's keep this pg rated). Husband never puts Wife's name on title, but he uses his earnings from work during the marriage to pay down the mortgage on the home. Eventually, they get divorced. Because Husband never put Wife's name on title, the home remains his separate property, but there is also a community interest in the home based upon how much of the principal of the mortgage was paid down during the marriage with his community property earnings from work, how much equity Husband had in the home at the time of marriage, how much the home appreciated in value during the marriage, how much the home appreciated in value after separation, and how much Husband paid down the mortgage after separation. These are factors that are plugged into a calculation called the Moore/Marsden formula. In the simplest terms, the Moore/Marsden formula gives the community a portion of any appreciation in the home based upon how much the community paid down the mortgage during the marriage.
One last example: Assume the Husband owns the home from prior to marriage, but then one month into the marriage, he puts Wife's name on title along with his. Under Family Code Section 721, there is a legal presumption of undue influence exerted by Wife over Husband because this was a transaction which benefitted the Wife to Husband's detriment (because he just gave half the house to Wife and received nothing in return). But this type of thing happens often, and it is not difficult for Wife to overcome the presumption of undue influence. Regardless, assuming that there is no undue influence, the home is now community property, but Husband still has a separate property reimbursement right in the home equal to his equity in the home at the time he put Wife's name on title with his. As in the very first example, if the parties divorce, Husband's separate property interest is to be paid first, and any remaining equity in the home is to be divided equally between the spouses.
How can I get the house in my divorce?
These examples illustrate the major issues that can arise when it comes to deciding what to do with the family home during a divorce, but there are quite a few other scenarios as well. Should you be contemplating divorce or legal separation, and have questions regarding the family home, we, at the Law Offices of Evan Samuelson, are here to help you.