Dividing Real Estate in Community Property States
In general, if the Real Estate is owned by the community, the community divides the Fair Market Value of the Real Estate at the time of division of the asset (transfer of funds).
The Real Estate may be sold, and the net proceeds divided.
The Real Estate can also be transferred from one spouse to the other with an equalization payment.
Real Estate owned prior to Marriage
The Separate Property of any Real Estate owned prior to marriage is identified (Traced) and a claim of reimbursement (Section 2640) is made for the separate property.
The community is entitled to a portion of the real estate owned prior to marriage as a result of the mortgage payments made during the marriage to the extent that the mortgage payments were made with community property funds. Had the mortgage payments and the principal reduction been made with separate property funds, the community would likely not have obtained any interest in the home through the Moore Marsden formula. Furthermore, if the principal had not been reduced and the mortgage payments made during the marriage were interest-only, regardless of whether the community or the separate property paid for it, there likely would not have been any interest to the community for the mortgage payments unless there was some other theory of reimbursement that could be made, such as, improvements to the home.
To conduct the Moore Marsden analysis take the market value of the home at the time of marriage and, the value of the home today. Take purchase price of the home, divide by principal payments during marriage. This is the community property interest in the home percentage. Multiply this percentage by the appreciation during the marriage to obtain the community property appreciation. Add % appreciation gained by community to the principal payments paid during marriage to get the Community portion of the property. Divide by ½ to get the other spouse’s portion of the community property.
You are Engaged to be married and may wish to purchase a property prior to marriage.
This is actually a good idea . . to purchase prior to marriage, and here is how I would consider structuring the deal.
Structure a Contract as a Business Proposition – Consider an LLC to own the house with each person as %owner-members of the LLC. This may have negative tax consequences upon sale as LLCs aren’t eligible for a homeowner’s Capital Gain Exclusion (if that tax break even exists when the house is sold).
or
Purchase as Tenants in Common. This title structure allows each party to then devise their ownership percentage to heirs of their choice – i.e. their own biological children.
Own the property in the %’s of the down payment. I.E. if one person puts down 60% of the DP, and the other 40%, one owns 60% and one 40%. (any percentages will do that reach 100%)
Pay the Mortgage, Interest, Property Tax, Upkeep, etc. in %’s of ownership.
When the house is sold, proceeds and costs also divided in % of ownership.
Consider that upon the death of the other (i.e. the first to go) that the living person will receive a Life Estate for the occupancy of the entire house for their life, and title and ownership will pass to the heirs only upon death of 2nd person. This gives the living person the right to stay in the house without the other’s children forcing a sale or moving into the house. The dead person’s estate would pay for the continuing % of all costs / repairs, etc. Life insurance can fund this.
Agree, in advance, what criteria will be used to determine when the house will be sold, i.e. what if one party cannot pay their %, or decides to terminate the relationship, etc. Will they have a right of first refusal to buy the other out? How will the value be decided (i.e. appraisal). Have these criteria spelled out in advance of the purchase.
State in the agreement what are the responsibilities of each person, i.e. cleaning / gardening / maintenance done by outside company paid in % of ownership, or split division of duties in the agreement . . . i.e. one will pay the bills and manage the garden, other will maintain the exterior of the house and systems, etc. The more you can spell this out PRIOR to arguments, the easier it will be to manage.
Make this easy on yourselves. If the monthly "nut" is $8,000, plus then you have property taxes, insurance and other non-monthly expenses, establish a bank account where the parties contribute, say, $6,000 and $4,000 each (in $ of ownership) monthly, and all agreed upon expenses of the real estate (mortgage, utilities, services, etc) are paid from that joint account. This simplifies the accounting and keeps it all in one place for ease in tracing if it is ever required.
Basically, treat this transaction as the business deal that it truly is.
The more you can take the EMOTION out of financial decisions, the healthier it is for the people and their relationships.
