What Becomes of the Family Residence in a Divorce?

in Family Law by Stephanie Blum

Among the issues that often need to be addressed during divorce is what happens to the family residence. How does a couple divide the house?

In California, unless there is a prenuptial agreement which governs how their property will be divided, all property acquired during the marriage as a result of either party’s work efforts is community property. Property owned prior to marriage or received by way of inheritance or gift is considered separate property. Community property is supposed to be divided equally between spouses. Separate property is confirmed to the spouse who owns that property.

The character of property, whether separate or community, is determined at the time of its acquisition. If it is community when acquired, it remains so throughout the marriage unless the spouses agree to change its nature or the spouse charged with its management makes a gift of it to the other. If a home is purchased during marriage, it is presumed to be community property, and thus the burden is on the spouse asserting its separate character to overcome the presumption.

The presumption applies, for example, even when a husband purchases property during the marriage with funds from an undisclosed or disputed source, such as an account or fund in which he has commingled his separate funds with community funds. In community property states such as California, property ownership turns on the method and timing of acquisition of the property.

Some might ask what happens to a house that is acquired when living somewhere other than California at the time acquired. Is it treated the same? The answer to that question is yes. Property acquired by either spouse while domiciled elsewhere, which would have been community property if the spouse who acquired the property had been domiciled in California at the time of its acquisition, is called quasi-community property. That too, must be divided in a divorce.

Even if a home is purchased by a couple during marriage, that does not mean that upon divorce the equity in the house will automatically be divided equally. If, for example, the wife made the down payment on the house with monies she inherited, or was gifted, or that she earned before marriage, she would be entitled to be reimbursed for the down payment notwithstanding that title to the home is held jointly.

California Family Code Section 2640 provides that unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property to the extent the party can trace the contributions to a separate property source.

That said, the amount reimbursed is without interest and may not exceed the net value of the property at the time of the division. Notably, contributions to the acquisition of property include not just down payments on property, but also payments for improvements or payments that reduce the principal of a loan used to finance the purchase or improvement of the property. In contrast, they exclude payments of interest on the loan or payments made for maintenance, insurance or taxes.

What if a wife similarly contributed separate property monies to a separate property house belonging to the husband? The answer to that question is wife is also entitled to reimbursement for that contribution unless there has been a written transmutation waiving the right to reimbursement.

To further complicate matters, and much to the surprise of some, the community can acquire an interest in a home that a spouse owned before marriage in his or her name only. If, for example, the husband owned a home before marriage but after the marriage continued to make the mortgage payments with monies he earned during marriage, at the time of divorce we determine how to apportion the equity in the home based upon the amount of the separate property obligation paid off with community funds.

Yet another question to be asked is what happens when a spouse’s name is added to the title of the other spouse’s separate property residence during marriage? How do you calculate who gets how much? This would require a determination of the fair market value of the property at the time of the conversion to joint ownership less the outstanding encumbrances and less any community property contributions prior to the conversion. A refinance during marriage may drastically change the equation. If the lender looks to the spouse’s earnings during marriage as the source for repayment of the loan, then it will be held to be a community contribution, regardless of whether the underlying security was that spouse’s separate property.

As is apparent, due to the complexities of these calculations, in the event that you or a loved one is going through a divorce where valuing or dividing the equity in a home is one of the issues, it is wise to consult competent family law counsel before entering into any agreements concerning same.

(This article appeared in the August 2023 issue of Living Brentwood)