Community Property and Separate Property: What’s the Difference?

Laws governing real estate can complicate divorce matters. Be sure to get expert advice before making financial decisions.
Laws governing real estate can complicate divorce matters. Be sure to get expert advice before making financial decisions.

 by Sara E. Milburn, Attorney at Law
Milburn Family Law, Laguna Beach, California

Many of my clients come into my office with the mistaken belief that after a long marriage, everything they own together is community property, and they are going to leave the marriage with one half of this property. Sometimes it is a shock for them to learn that is not necessarily the case.

Property issues in a divorce can be very complex. These are the basics to help you start working through your decision-making process.

Separate Property

In California, separate property is defined by Family Code 770. Separate property of a married person includes all of the following:

  1. All property owned by the person before the marriage,
  2. All gifts or inheritances received.
  3. The rents and profits the separate property earns.

Where this can become confusing is when the spouse who owns the separate property uses his time and talent (called “community effort”) to cause an increase to his or her own separate property. This must be more than a diminutive amount of time or effort. The court has wide discretion here. If the separate property was a stock account and the spouse was a day trader then there would be considerable community effort and the increase in value of the stock might be part community property. If it was a stock account that was managed by a financial advisor with only minimal decisions made by the spouse that would probably not give the community any interest in the increase in value of the stock account.

Community Property

Except as otherwise provided by California law, community property is considered all property acquired by a married person during the marriage. The exception is property specifically identified up front as separate property. Examples include property owned before marriage, gifts or inheritances as long as the source of funds to acquire the asset was community funds (i.e., earnings by either or both spouses during the marriage).

Co-Mingled Property

If separate property and community property in the way of money or investments are both deposited into the same account or asset owned jointly by the spouses, it may create issues of tracing. A forensic accountant with specific expertise will need to become involved.

Separate Property: Stock Accounts or Bank Accounts

If one spouse owns stock in a public company, or has a bank account that remains in his or her name as a separate account, and no community property earnings are placed into their separate account, then no matter how much the account balance grows through earnings or interest, the other spouse will have no interest in that investment.

Separate Home Before Marriage

With people getting married at older ages, and with numerous second (and third and more) marriages, this is a common situation. One of the spouses may own a home in their own name at the start of the marriage. They may never add their spouse’s name on the title to the home. In this situation, the home remains the separate property of the spouse who owned the home prior to the marriage, as his or her sole and separate property. This is true even if the couple lived in the home 30 years during their marriage.

The community might receive a portion of the equity if the mortgage was paid down during the marriage. There is a formula that is used (called “Moore-Marsden”)  but the house remains the separate property of the spouse who owned the home before marriage. If the spouse who owned the home prior to marriage does add his or her spouse’s name to the title on the property, the non-owner spouse would be entitled to half of the appreciation in value of the home that took place AFTER his or her name was added to the title.

Separate Home Purchased During Marriage

It is possible for one spouse to use their separate money to buy a house by themselves and for themselves alone during the marriage, and take title in their own name as their separate property. If there is a mortgage loan on the property-it may create a community interest in the separate property home due to the debt obligation.

Using Separate Property As a Down Payment on a Community Property Home Purchase

If an individual sells his or her separate property home purchased prior to the marriage, and uses the proceeds to help buy a new home with both spouses’ names on the title as the legal owners, the spouse who owned the separate property before marriage can still set aside the amount invested as a down payment as his or her separate property. There is an absolute right to reimbursement of separate property. See California Family Code 2640.

This is an example of how it might work. Wife “Melissa” owned a townhouse before her marriage to “Mario.” Melissa sells the townhome for $300,000. She and Mario then buy a new single family home for $700,000. She uses the $300,000 from the townhome as the down payment. Then Melissa and Mario take out a mortgage loan for the remaining $400.000. Ten years later, Melissa and Mario get divorced. They sell the house for $850,000. After paying off the loans and fees, Melissa and Mario have $620,000. Melissa receives her original $300,000 down payment off the top. Then Melissa and Mario split the remaining $320,000, receiving $160,000 each. Melissa receives $460,000, and Mario receives $160,000.

Separate Property: Business

When a business owned by one of the spouses grows in value during the marriage there are two conflicting cases in the law which define how to apportion the profits.

Under the Pereira case definition, “a fair return “ on the separate property investment is given and the balance of the increased value is allocated to the Community Property because the time and talent of the spouse is Community Property.

Under the Van Camp case definition, the court would determine the reasonable value of the community’s service, and allocate that amount to the Community Property and allocate the balance to the Separate Property.

If this seems confusing or complicated, you are right. It can be very complicated. This is why it’s essential to rely on trustworthy advice from legal and financial advisors who have expertise in property division as the result of a divorce to help you understand your options and your rights under the law. It is worth investing in this guidance to help you avoid costly mistakes due to unfamiliarity with your best options.