California Community Property Law Explained

California is a community property state. In plain English, this means that generally, property acquired during the marriage by either spouse is presumed to be owned by each spouse equally.  When it is time to divide all of the property existing at the time of separation, Family Code Section 2550 requires the community estate to be divided equally.  This means that absent an agreement between the parties to the contrary, the Court is obligated to make sure there is an exact 50/50 division of community assets and debts.  There are exceptions to this general rule, which will be covered in another article.

This guide is intended to provide an easy-to-understand explanation of California community property law as it is applied in Irvine and Orange County divorce cases, as well as to provide real-world examples of how the law might be applied to certain fact patterns.

For a better idea of how a court will divide the community property, take the following scenario: You are separating from your spouse today after a marriage of 10 years. Today you and your spouse own the following property:

*A Newport Beach house titled in the names of both spouses with a mortgage in the names of both Husband and Wife in the amount of $200,000.  Wife wants to keep the house.  The house has a net community interest of $600,000.
*2 cars, one titled in Husband’s name, and the other in Wife’s name. Husband’s car has no debt. Wife’s car has $3,000 left on the loan.
*A 401(k) in Husband’s name. Husband began contributing his earnings to this 401(k) 5 years before the marriage and has continued to do so.
*A joint bank account with money earned from the parties’ employment during marriage and another account in Wife’s name with the inheritance from her mother’s estate that she received 3 years ago.
*A catering business in Wife’s name named “Food on the Run” that was started during the marriage.
*A 2-year-old bulldog named Georgia that Husband gave to Wife for her 40th birthday. Wife feeds, walks and picks up after Georgia. Husband ignores Georgia most of the time.
*Husband has a credit card with a balance of $2,000.
*5 years into the marriage Wife obtained a student loan in the amount of $50,000 for her basket weaving degree at Chump University. Wife defaulted, and now the balance is $60,000.

Usually, the last issue to resolve in a divorce case is the division of property and debt.  However, before you can split up your stuff, you need to know how much your stuff is worth.  Early on in the divorce process the parties will each serve a Preliminary Declarations of Disclosure (known as the PDOD).  The PDOD will contain a list of assets and debts owned by the parties at the time they separated. Starting with the house, let’s assume Husband thinks the house is worth $600,000, and Wife thinks it’s worth $1,000,000. Since the parties disagree, they decide to jointly retain an appraiser to value the residence. The appraiser concludes that the house is worth $800,000, and the parties agree on that value. Because of the $200,000 mortgage, the net community interest in the house is $600,000 ($800,000 – $200,000).

Typically, your Orange County divorce attorneys will look up the Kelley Blue Book (Private Party value) of the vehicle. After looking up the values, we find that Husband’s car is valued at $10,000, and Wife’s car is valued at $15,000. Since Husband’s car has no debt, the community equity is $10,000. Wife’s car has $3,000 in debt, leaving the community with $12,000 in equity. Despite the fact that Wife’s car is in her name, Husband owns 50% of the car, and the same principle applies to Husband’s car. On the other side of the coin, despite the fact that Wife’s car has a debt of $3,000, Husband is responsible for half of the debt.

Husband has provided his most recent quarterly 401(k) statement, which states that his 401(k) is worth $150,000. Husband began contributing to the 401(k) five (5) years before marriage. This fact triggers the separate property presumption: Property acquired before marriage is presumed to be separate property.  Here, you have a mixture of community and separate property because, for the last 10 years, Husband has been contributing a portion of his earnings to his 401(k). Case law says that the value of the 401(k) will be divided in proportion to the community and separate interests. Accordingly, the community interest in the 401(k) will be 2/3 of its value because the parties were married 10 years out of the 15 that Husband was contributing to the 401(k). Additionally, Husband will receive 1/3 as his separate property because he contributed to it for 5 years before marriage. Therefore, the community has an interest of $100,000, and Husband’s separate property interest is $50,000.

The joint bank account has $10,000. Because the money in the account was earned during marriage, the community has a $10,000 interest. But Wife’s account has funds that she received from an inheritance. It is true that she received the inheritance during the marriage. However, an exception to the rule that property acquired during the marriage is community property is property acquired by inheritance. Absent a written agreement otherwise, Wife’s inheritance will be her separate property and therefore not included in the division of the community estate.

Wife’s catering business was started during the marriage with a bank loan in both parties’ names. The bank loan is paid off. It’s time to figure out how much the community interest is in the business. Husband thinks it’s worth something; Wife’s thinks it’s worthless. The parties jointly retain an expert under Evidence Code 730 to provide an unbiased report to the court and the parties about the value of the business. The expert determines the community interest in the business is $30,000. The parties go with the expert’s recommendation.

There are two ways for the court to handle a situation where both parties want a family pet.  The first is to ask whether the pet was a gift to one of the parties. If so, then it is likely going to be separate property confirmed to that person. (Fam. Code §770.)  If the pet is community property, then the court should consider the psychological attachment which each party has to the animal in making its decision. (See In re Marriage of Fink [Fink II] (1979) 25 Cal.3d 877, [court may consider “personal nature” of assets in making division].  As to the value of the pet, the court must utilize its discretion in making the determination. In this scenario, because Georgia was a gift to Wife, and Wife has an obvious affinity to Georgia that Husband does not have, Georgia will be awarded to Wife as her sole and separate property.  Importantly, Wife won’t have to pay anything to Husband for the family dog because it has no value.

Husband’s credit card has a balance of $2,000. The $2,000 balance was accumulated during the marriage, requiring both spouses to 50% responsible for the debt.

Student loans are treated a little differently by the courts. Pursuant to California Family Code section 2641, the spouse who takes out the loans is generally the one responsible for paying for them. An exception occurs when the community substantially benefits from the education, and that loan was taken out more than 10 years before the dissolution was filed. Had Wife taken out a student loan for a culinary degree at the beginning of the marriage, she may have been able to seek an order from the court requiring Husband to reimburse her for the loans. In our scenario, Wife’s basket weaving degree did not benefit the community, and it was taken out 5 years ago. Wife will be responsible for the $60,000 balance on the loan.

Once you know what you have and you know how much everything is worth, you can divide up your property. In our scenario, the community estate has a net equity of $760,000. That means that each party should come out with about $380,000 in equity.  Since Wife wants to remain in the residence, she will need to find a way to pay Husband his share of the community residence and remove him from the loan, as well as pay his community interest in the business and her car.

Consider this scenario:  Wife gives up her portion of Husband’s 401(k) ($50,000), her portion of the joint bank account ($5,000), and her interest in Husband’s car ($5,000), or $60,000. Wife agrees to be responsible for the credit card debt of $2,000. The division of property judgment may look like this:

I. IT IS ORDERED THAT HUSBAND SHALL RECEIVE THE FOLLOWING AS HIS SOLE AND SEPARATE PROPERTY, INCLUDING ALL DEBT OWING THEREON:
A. THE ENTIRETY OF HIS 401(k) (COMMUNITY INTEREST = $100,000);
B. THE $10,000 IN THE JOINT BANK ACCOUNT (COMMUNITY INTEREST = $10,000);
C. HIS CAR WITH A COMMUNITY INTEREST OF $10,000
D. TOTAL COMMUNITY INTEREST = $120,000

II. IT IS ORDERED THAT WIFE SHALL RECEIVE THE FOLLOWING AS HER SOLE AND SEPARATE PROPERTY, INCLUDING ALL DEBT OWING THEREON:
A. THE NEWPORT BEACH HOUSE WITH A COMMUNITY PROPERTY EQUITY OF $600,000;
B. THE CAR IN HER NAME WITH A COMMUNITY PROPERTY EQUITY OF $12,000
C. THE BANK ACCOUNT IN HER NAME ALONE WITH 0 COMMUNITY PROPERTY VALUE;
D. THE BUSINESS KNOWN AS “FOOD ON THE RUN” WITH A COMMUNITY PROPERTY VALUE OF $30,000;
E. THE BULLDOG, GEORGIA;
F. THE CREDIT CARD WITH A COMMUNITY PROPERTY BALANCE OF $2,000;
G. THE STUDENT LOAN IN HER NAME WITH A SEPARATE PROPERTY BALANCE OF $60,000.
H. TOTAL COMMUNITY INTEREST AWARDED TO WIFE: $640,000

III. EQUALIZATION PAYMENT: To equalize the division of community assets, Wife shall pay Husband the sum of $260,000 within 60 days of the date Husband signs the Judgment. Wife shall cause Husband’s name to be removed from the loan on the Residence within 60 days of Husband signing the Judgment.

Since Wife received $520,000 more in community assets, she will need to make an equalization payment to Husband to equalize the division of assets. Thus, Wife has to pay Husband one-half of $520,000, or $260,000 to satisfy the equal division requirement. This will give Husband $120,000 + $260,000, or $380,000. Likewise, Wife receives $640,000 – $260,000 = $380,000.  If Wife in this scenario cannot pay the equalization payment, the house may need to be sold with Husband receiving his share of the community estate out of the proceeds from the sale.

Hopefully, you can divide the property by agreement. If you can, your Orange County family law attorney can draft a Marital Settlement Agreement.  Keep in mind that the issue of spousal support may be an issue and the division of assets and debts might be related to spousal support.  For example, if Husband might have to pay spousal support to Wife, the parties are free to enter into agreements such as a “spousal support buyout” to offset some of the equalization payment that will be required.

When the parties do not agree on the community interest in marital property, then it is more likely that the court will divide the property. Your Orange County asset division attorneys will work with you to develop a strategy to obtain the best possible result at trial.  Contact our office today for a free, private consultation.