Calculating the Community’s Interest in a Separate Property Asset

A transmutation of property occurs when the spouses agree to change the nature of the property. For example, suppose Henry owns a house, classified as his separate property, located in Corona, California. Henry decides he wants to share this property with Wendy and give her a legal interest in the property. In this example, Henry wants to change to the nature of his house from his separate property to community property. In order to validly transmute the property, or change the nature of the property, Henry must execute a written document according to the specifications of the Family Code.

Without this written document, the nature of property cannot change from separate to community property. So, if Henry tells Wendy “I would like the Corona house to be our community property,” this statement alone is not a valid transmutation. There must be a writing that confirms the intent to change the nature of the property.

In certain circumstances, the community can develop an interest in a separate property asset; however, despite this newly acquired interest, the nature of the property does not change from separate property to community property. That is the fact situation of Marriage of Moore.

As discussed above, without an agreement otherwise, separate property remains the property of the separate property holder. In some instances, however, the community may acquire an interest in the separate property. In Marriage of Moore, Lydie Moore, prior to marriage, purchased a house in her name and acquired a mortgage for that property. Additionally, she made a down payment and began to repay loan. This occurred prior to her marriage to David so both the house and the loan are classified as Lydie’s separate property.

After David and Lydie married, they moved into Lydie’s house and made payments on Lydie’s mortgage using community property funds. During this time, the house appreciated in value. When the couple separate and moved for dissolution of marriage, David argued that the community acquired an interest in the property and that the community should be compensated for this interest in the property.

The Court agreed, however, it had to decide the Newport Residences extent of the community’s interest in the property. Ultimately, the Court decided that the community’s interest is based on the amount of community funds used to reduce the total purchase price. Additionally, the Court decided that community funds used to pay interest on the loan and taxes would not be included to calculate the community’s interest in the property.

To illustrate the Court’s decision, I will use the marriage of Henry and Wendy. Assume that in 2000, prior to marriage, Wendy purchased a house in Rancho Cucamonga. The purchase price of the house is $100,000. Additionally, she secured a mortgage in her name and put $20,000 down. By 2003, Wendy paid a total of $10,000 in payments. In 2005, Wendy and Henry marry. The couple decides to live in Wendy’s home. After marriage, the couple pays $10,000 in mortgage payments. In 2010, Henry and Wendy file for dissolution of marriage. At the time of divorce, the property is worth $150,000.

 

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