You are no doubt aware of the basics of divorce law in California. Community property is property acquired by a couple during the marriage. Community property is 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, action taken by a spouse during marriage may have the unintended consequence 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?
In one situation, the spouses together pay off the separate property home of one of the spouses with community property funds. This could easily be the case where each spouse uses his or her paycheck, community property funds, to contribute to the mortgage of the other spouse’s home.
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 (community property) toward that 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 is used pay the principal of the separate mortgage, the community is acquiring an interest in 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 to 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 agreement before marriage or postnuptial agreement after marriage making likely sources of otherwise community income separate income. Otherwise, during a divorce — surprise!