Payments Made Toward Separate Property House

By Schonauer Law on Sep 09, 2015 at 02:05 PM in Legal Questions

Payments Made Toward Separate Property House

QUESTION: During our marriage, community funds were used to pay down principal, property taxes, and make major renovations and upgrades on residence owned by Petitioner prior to the marriage.

We total these amounts up and divide by 2, correct?


ANSWER: Payments on an existing mortgage and “improvements” to the property (renovations and upgrades) are all handled differently under California law. Another major concern will be the appreciation/depreciation of the property during the marriage.

PRINCIPAL: When Community property is used to reduce the principal of a separate property loan on a house owned by one spouse alone, the community gets a pro rata equity interest in the home.  The equity interest is equal to reduction in principal only.  The community gets no credit or reimbursement for the payment made toward interest or insurance.  Example:  Real property is purchased before marriage by one spouse for $535,000 through down payment and separate property loan.  During the marriage the community reduces the principal owed on the loan by $70,000.  The community now has a 13.08% interest in the home.  This means, that the community will “own” 13.08% (pro rata share) of any appreciation in the home besides the $70,000 Investment.

The present state of the law regarding community contributions to reduce a separate property debt on real property can produce some strange results.  During the nascency of a loan, the bulk of a mortgage payment is used to pay interest.  Mortgage payments made late in the life of the loan reduce the principal to a much greater extent.  This means that a ten-year marriage near the beginning of a loan results in the community having approximately a 20% share in the home, while a 10-year marriage at the end of the loan result in a 50% interest.

What if the house depreciates during the marriage?  The courts have not come to an affirmative answer regarding depreciation.  The courts may reduce the community’s interest proportional to its pro rata share.  Using the $70,000 example above, if the house depreciates by 10% the community would lose $7,000 of interest in the home.  The community will probably be treated as a preferred owner, meaning that the community will receive no less that what was contributed, or $70,000.

Capital Improvements to a Home:  The courts have yet to agree how to deal with improvements.  The community can expect to be reimbursed at least the money spent on the improvement.  Alternatively, the court may award the community a pro rata share of the increase in value attributed

I am licensed in California only. My answer here is based upon California Law. My answer here is not based upon your particular facts, and is not legal advice. For a more complete answer, based upon your particular situation, I advise that you consult with an attorney