By Keith F. Carr, Esq.
Community property is property acquired by a couple during the marriage. As you are aware, community property gets awarded to each spouse during a divorce. Separate property is property acquired by one of the spouses either before marriage, after the marriage, or during the marriage by gift or inheritance. During a divorce, separate property is affirmed in the spouse who owns it.
In some cases, (two of which are discussed here), action taken by the spouses during marriage have the unintended consequences of turning separate property into community property. In a divorce situation, often the spouse that thought he or she had a solid claim to an asset as his or her own separate property is shocked to learn that a percentage or all of the asset has been turned into community property.
How does this happen in the dissolution context?
The first situation: When the spouses together pay off the separate property home of one of the spouses with community property funds. This could easily be the case were each spouse works in uses his or her paycheck, community property funds, to contribute to the mortgage of the other spouse.
One day before the beginning of the marriage, one spouse’s home was separate property and a mortgage on the home was his or her own separate debt. During the marriage, each spouse will contribute a part of his or her paycheck (the humidity property funds) toward that mortgage. This is the most common situation -- but it could be any community asset is used to pay the separate mortgage.
So you say it's no big deal. Okay, so the spouse and I pay down the mortgage. We haven't changed the grant deed or anything.
This is wrong. Under California law, the property is slowly but surely transforming into community property.
How is this done? Under California Law, to the extent that the community property bank account or earnings is used pay the principal of the separate mortgage, the community is acquiring an interest on the home. Sure, it's slow. As you are aware each payment is applied to interest and principal on the mortgage. To the extent the community property is used pay off principal, the property is converted to community property.
After many years of payments in this manner, the community will acquire a significant interest in the property that was at one time the separate property of one of the spouses.
The best way for a couple to deal with this problem is to execute a prenuptial or postnuptial agreement making likely sources of otherwise community income (used pay debts), separate. Otherwise, during a divorce -- surprise!
The second situation involves refinancing the property. With the increase in home prices during the last seven years powered by the decrease in interest rates, many couples in California are looking to refinance to take advantage of lower interest rates, to improve their homes, or simply to bankroll vacations.
If the real-estate was acquired during marriage, it is of course community property. No problem. But what if the property was separate property, acquired by one of the spouses prior to the marriage. Now that spouse seeks to refinance with his or her spouse. Note that this will often happened if the spouse holding the separate property has bad credit and needs the other spouse to help him or her refinance.
In most cases I've seen, a couple will join together to refinance the separate real estate. As part of the process, the mortgage company will insist that the couple’s names be reflected on the new grant deed. What is the big deal you say? It's just routine by the bank.
After it is recorded, the new grant deed reflects the spouse’s names usually as joint tenants. In California, there is a presumption of title. This means that the form of title will be presumed first. The presumption can be rebutted. Regardless of intention, the new grant deed determines the characterization of the property. The new property will now be community property.
So without intending it, the couple has changed the property from separate property of one of the spouses to community property. The couples should not have refinanced together. In the alternative, they could, with the bank's consent (very hard to achieve), execute another grant deed making the property again separate property.
The point is now it's a problem. Know what you are doing when it comes to your home.