Separating Community Interest In Separate Property In California
The State of California is a community property state when it comes to the division of property during divorce proceedings. Generally, in community property states, property acquired during marriage, except for gifts and inheritances, is owned jointly by both spouses and is divided equally upon divorce or annulment.
Thus property owned by one spouse before marriage is generally considered the separate property of that spouse. However, when couples get married they begin spending the money and resources they accumulate together on the things they already owned, including the property owned by one spouse before the marriage. The question then becomes, what interest does the “community” have in the separate property if the couple should divorce? In California, this question was answered by the California Supreme Court and has become known as the Moore/Marsden formula.
The Supreme Court cases
The Moore/Marsden formula was created by the California Supreme Court’s rulings in two separate cases: In re Marriage of Moore (1980) 28 Cal.3d 366 (Moore) and In re Marriage of Marsden(1982) 130 Cal.App.3d 426 (Marsden).
In the Marsden case, the Court clarified a rule set out in the Moore case and adopted a method of calculating the community’s interest in separate property that has now become the standard for answering such questions. The Court decided that when the Community makes a payment to a separate property asset, the community gains an interest in that property and must be reimbursed during divorce proceedings.
The Moore/Marsden Formula
In deciding the Moore/Marsden cases, the Court set out a formula to determine what interest the community has in a separate property asset.
The formula is as follows:
CP = PPCP + (CP% x MAPP)
In the formula:
CP stands for Community Property Interest;
PPCP stands for payments towards the Principal from community;
CP% stands for the Community Property Percentage with is PPCP/purchase price; CP%: Community property percentage = PPCP / Purchase Price
And MAPP stands for appreciation of the separate property asset during marriage.
The Separate Property formula is:
SP = DP + PPSP + Pre-MAPP + (SP% x MAPP)
In this formula:
SP stands for Separate Property;
DP stands for the down payment on the property;
PPSP stands for payments towards the Principal from separate property;
Pre-MAPP stands for Pre-marriage appreciation;
SP% stands for Separate property percentage with is 100% - (PPCP/Purchase Price)
“A” purchased a home for $200,000 in 1992 prior to getting married. “A” made a down payment of $50,000 and borrowed the remaining $150,000. “A” paid $20,000 in principal before getting married in 1997 to “B”. The fair market value of the home in 1997 was $300,000.
During the marriage, “A” and “B” paid $30,000 towards the principal from community property. When “A” and “B” separated in 2005, the fair market value of the home was $500,000.
Applying the Moore/Marsden formula:
The CP% = $30,000/$200,000 = 15%
The Separate property interest for “A” is 100%- 15% = 85%.
Community property interest = PPCP + (CP% x MAPP)
= $30,000 + (15% x $200,000)
= $30,000 + $30,000
As the community interest is divided in half, both “A” and “B” will get = ($60,000/2) = $30,000 each.
“A’s” separate property interest = DP + PPSP + Pre-MAPP + (SP% x MAPP)
= $50,000 + $20,000 + $100,000 + (85% x 200,000)
= $170,000 + $170,000
On separation and divorce, “B” gets: $30,000 as community interest in the property.
And, “A’s” community and separate property interests = $340,000+ $30,000 = $370,000
The Principal balance of the loan to be paid off by “A” = $150,000 - ($20,000 + $30,000) = $100,000
So, when a couple divorces in a community property state like California, the court will awards the community interest to each spouse and 100% separate property to the spouse who bought the property with separate funds.
Dena Bez is a licensed California Attorney whose practice focuses on family law including divorce, custody disputes, domestic partnership issues and estate planning.
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