Community Interest
Your community interest in property is created when either you or your spouse use community funds to pay-down a mortgage on one spouse’s separate property. This often happens when one spouse has purchased a home before marriage, which is mortgaged, and then uses their income for employment to pay on the loan during marriage.
Apportionable Interest
When community funds are used to make payments to reduce the principal balance of a separate property mortgage, a community interest is created. The community interest is an apportionable ownership interest in the mortgaged property consisting of a dollar-for-dollar reimbursement for those payments and an interest in the appreciation of the separate property. See Marriage of Moore (1980) 28 C3d 366; Marriage of Marsden (1982) 130 CA3d 426. The apportionment to determine your community interest is now called the “Moore-Marsden Rule.”
The court in Bono v Clark (2002) 103 CA4th 1409, 1422, criticized on other grounds in Marriage of Sherman (2005) 133 CA4th 795, 802, extended the Moore-Marsden Rule to community expenditures for improvements to the owner’s separate property. See also Marriage of Allen (2002) 96 CA4th 497. Thus, when community funds are used to make capital improvements to separate property, the community may acquire an ownership interest in the separate property consisting of:
- Dollar-for-dollar reimbursement for contributions to capital improvements (even if the improvements did not enhance the property’s value); and,
- An interest in the appreciation of the separate property, provided the improvements actually increase the value of the property.
Community Funds Used to Pay on Separate Property
When community funds are used to make mortgage payments on separate property, it has long been the law that your community interest in the property is by virtue of the principal payments. See, e.g., Marriage of Moore (1980) 28 C3d 366, 371 (property acquired before marriage); Marriage of Broderick (1989) 209 CA3d 489, 503 (property acquired during marriage).
The effect of using community funds to pay for improvements to separate property has been unclear, however, regarding both the community’s right to reimbursement (Marriage of Camire (1980) 105 CA3d 859, 866) and the extent of any community interest acquired in the property. See Marriage of Wolfe (2001) 91 CA4th 962, 966 (court allowed reimbursement of dollars invested but did not address whether community had right to pro tanto interest in separate property’s enhanced value). In Marriage of Allen (2002) 96 CA4th 497, the court held that there is no presumption of a gift when a spouse consents to the use of community funds to make capital improvements to the other spouse’s separate property, reasoning that Marriage of Camire, supra, predated the Moore-Marsden Rule.
In a probate matter that followed an unconcluded marital dissolution, an appellate court agreed with Allen and held that if the improvements contributed to an increase in the separate property’s value as measured by a formula set out in the case, then the community is entitled to a pro tanto interest in the separate property. See Bono v Clark (2002) 103 CA4th 1409. If the improvements did not increase the separate property’s value, then the community is entitled to reimbursement for its expenditures toward the improvements. 103 CA4th at 1425.
Community Interest in Property Acquired Before Marriage
It is not uncommon for community funds to be used for mortgage payments on property purchased by one or both of the spouses before marriage. When this occurs, the community interest is a pro tanto interest in the ratio that the payments on the purchase price made with community funds bear to the total payments on the purchase price, and any appreciation must be apportioned accordingly. See Marriage of Moore (1980) 28 C3d 366, 371, 373. In calculating the respective separate and community interests, amounts paid for interest, taxes, and insurance are excluded because they do not increase the owner’s equity in the property. In addressing the respective contributions of the separate and community property to the purchase price, the value of the loan taken to purchase the property must be recognized. The proceeds will be treated as a separate property contribution when the loan is based on separate assets and treated as a community property contribution when the loan is based on community assets.
The proper approach to apportioning between separate and community interests when one party purchases property by making a down payment and securing a loan before marriage, and the community makes payments on the loan during marriage, is set forth in Marriage of Marsden (1982) 130 CA3d 426. In Marsden, the husband purchased a leasehold and house before marriage for $38,300. He made down payments of $8,300 and secured a loan for the remaining $30,000. By the time of the marriage, the husband had reduced the principal due on the loan by $7,000. The trial court found the fair market value of the house and leasehold interest at the time of the marriage to be $65,000. Thus, the appreciation before marriage was $26,700 ($65,000 minus $38,300). Between the date of marriage and the date of separation, payments from community funds further reduced the principal due on the loan by $9,200. Between the date of separation and the time of trial, the husband reduced the principal due by an additional $655. The trial court found the fair market value at the time of trial to be $182,500. Thus, the appreciation during marriage was $117,500 ($182,500 minus $65,000). The balance on the loan at the time of trial was $13,145. 130.
The Marsden court determined the community property interest to be 24.02 percent, i.e., the ratio that the payments on the purchase price made with community funds ($9,200) bore to the total payments on the purchase price ($38,300). Note that the loan proceeds, to the extent that they have not been offset by community loan payments, are recognized as a separate property contribution toward the purchase price. The separate property interest was the remaining 75.98 percent,i.e., the ratio that the payments on the purchase price made with separate funds ($8,300 down payments, plus $30,000 loan proceeds less $9,200 community payments, equals $29,100) bore to the total payments on the purchase price. The separate property was credited with:
- Down payments: $8,300.00;
- Loan payments before marriage: $7,000.00;
- Loan payments during marriage: $ 655.00;
- 100 of appreciation before marriage: $26,700.00;
- 75.98 % of appreciation during marrige: $89,276.50;
- TOTAL: $131,931.50
The community property was credited with:
- Loan payments during marriage: $9,200.00;
- 24.02% of appreciation during marriage: $28,223.50;
- TOTAL: $37,423.50
The separate property interest of $131,931.50 was confirmed to the husband and, in addition, he was awarded half of the community interest of $37,423.50, or $18,711.75, for a total of $150,643.25. The wife was awarded half of the community interest, or $18,711.75. The husband was assigned the balance due on the loan. Thus:
- Husband’s share of equity: $150,643.25;
- Wife’s share of equity: $18,711.75;
- Loan balance: $13,145.00;
- Fair Market Value: $182,500.00
The Moore Marsden Calculation for Your Community Interest
- Purchase price of home: _______________
- Amount of down payment: _____________
- Amount of payments on loan principal made with separate funds: _______________
- Fair market value at date of marriage: ________________
- Amount of payments on loan principal made with community funds: _____________
- Fair market value at time of division: ________________
- Subtract line 1 from line 4: ________________
- Subtract line 4 from line 6: _______________
- Divide line 5 by line 1: __________________
- Multiply line 8 by line 9: ________________
- Subtract line 10 from line 8: _________________
- Add lines 2, 3, 7, and 11 for the separate property interest: _________________
- Add lines 5 and 10 for the community property interest): __________________
Both Parties Contribute Separate Property Toward Purchase
When both parties have made separate property contributions to the purchase price of the property, each party acquires a separate property interest to be ascertained by making the Marsden calculations. See Marriage of Rico (1992) 10 CA4th 706. Following the principle set forth in Family Code §2552, requiring the court to value assets and liabilities as near as practicable to the time of trial, the proper valuation date for a community property residence for purposes of a dissolution proceeding is the date of trial unless there is some reason that renders this result inequitable. See Marriage of Sherman (2005) 133 CA4th 795, 800.
In one case, the Moore-Marsden approach was applied when a community property home was converted by a quitclaim deed during the marriage to the husband’s separate property, and community funds were thereafter used to make loan payments. See Marriage of Broderick (1989) 209 CA3d 489, 501. The only community contributions to be included in determining the community interest in the home, however, were those made after the execution of the quitclaim deed.
Although it is usually applied to family residences, the approach set forth here is equally applicable to other real property. See, e.g., Marriage of Frick (1986) 181 CA3d 997, 1007 (real property used to operate hotel and restaurant).
Likewise, although it is usually applied to the use of community funds to make payments on one spouse’s preexisting loan, this approach is equally applicable to the use of proceeds from a community loan to pay off the preexisting separate loan. See Marriage of Branco (1996) 47 CA4th 1621, 1627.
Marriage of Moore, supra, although it did not expressly consider the issue, appears to foreclose the spouse who owns the separate property from seeking to avoid the community interest by arguing that the community payments were a gift to him or her. One court allowed such an argument, however, and held, on that basis, that a residence was entirely separate property despite community payments on two mortgages. See Marriage of Stoner (1983) 147 CA3d 858, 864. But in another case, although noting that the conflict has never been directly addressed in any California published decision, the court concluded that Moore is binding precedent, which provides the community with a proportional interest even when the payment of community funds was made with the knowledge and apparent consent of the spouse asserting the community interest. See Marriage of Gowdy (1986) 178 CA3d 1228, 1230, 1234.
It is interesting to note the distinction between community funds applied to separate property and separate funds applied to community property or the other spouse’s separate property estate. In the former situation, the rule is of judicial origin (Marriage of Moore, supra) and apportionment is the remedy. In the latter situations, the rule is statutory (Family Code §2640) and reimbursement is the remedy.
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