Divorce has a huge impact on your financial future. One of the biggest parts of the process is the division of property. Because this leaves such a lasting impression, it’s vital to understand how California splits assets.
There are two ways that the courts divide assets and debts in the United States. Most states use the equitable distribution model. The remainder adheres to community property statutes.
What’s the difference between the two and how does this affect your divorce settlement? Which set of rules does California follow to split assets in a divorce?
Is California A Community Property State?
Yes, California is a community property state. Understanding what that means and how it affects the division of debts and assets in your divorce has a huge influence on your settlement.
Community property states view all assets acquired during a marriage as joint property regardless of title.
This means that if, while married, you purchase a house (or car, boat, or another big-ticket item) and only your name is on the title, the law still views it as belonging equally to you and your spouse.
There are, of course, exceptions to this rule. For instance, inheritance falls outside of these guidelines. In general, if you inherit something, it stays yours.
Many people interpret community property to mean there is an automatic 50/50 split of assets in a divorce in California. That, however, is not the case.
Related Reading: How Is Debt Divided in California?
How is Property Divided?
As stated, in California, if you acquire an item during the marriage, both parties have an equal claim to ownership. That’s true no matter who appears on documents as the owner.
For example, if you use joint funds to buy a car, but put it solely in your name, according to the court, it belongs to both of you. The same goes for a house, condo, and most significant purchases.
But that doesn’t mean the court awards everyone half of everything.
When it comes to splitting assets in divorce, California courts aim for a fair and equitable division. The general idea is for exes to come out on relatively even footing and for each to enjoy a standard of living similar to that which they experienced during the marriage.
As you might imagine, this greatly impacts divorce settlements.
In some instances, it makes sense for one spouse to take an unequal division of assets in exchange for lower support payments. This type of arrangement can be more financially advantageous in the long run.
As we said earlier, some items fall outside of community property rules. For assets to be excluded as marital property, the item must be purchased solely in one spouse’s name and maintained using money that is separate from marital funds. The longer a marriage lasts, the more entwined two lives become, and the blurrier these lines get.
Related Reading: Dividing Military Benefits and Pensions
An Example of Excluded Property:
Imagine you want to purchase a car and keep it from being considered community property.
You need to title the car in your name only and use separate funds for the purchase. Additionally, all maintenance and insurance must also come from this separate account. If you use any shared money for this purpose, the court may consider this community property. As such, it then becomes subject to the division of property.
One example is if you inherit money and use it for this purpose.
Things do often become cloudy, however. Say you use your own individual income to buy a car in your name. That purchase is subject to being divided in the divorce. Under community property rules, California views money earned during a marriage as belonging to both spouses. Thus, any items purchased with these funds are considered marital property.
Regardless if you live in a community property state or an equitable distribution state like our neighbors up in Oregon, the division of property and debts should be carefully considered. Thoughtful planning and an effective strategy can prove very effective in protecting your interests through the divorce process.
Related Reading: Bankruptcy Or Divorce: Which One Do You File First?
Asset Division Questions From the Radio
Our founding partner, Rick Jones, makes regular appearances on the Danny Bonaduce and Sarah Morning Show, where he addresses listener’s family law questions. Since this topic comes up so often in divorce, it also comes up frequently on the radio.
A Pre-Existing Asset
Caller: “My wife asked for a divorce last week. I bought a house before we met, in 2003. It’s in my name. We married in 2007, [and] bought two vehicles. I still owe $25,000 on them; they’re in my name only. I have a 401K, I’ve got an IRA. She only worked for a short time and now she’s employed part-time. My question is, what is she entitled to? Alimony? Half the house?”
[Rick giggles in the background, laughter from everyone ensues.]
Danny: “That was a fairly evil laugh from your lawyer.”
Rick: “Uhh…what time does this show end?”
Danny: “Really? It’s that deep of an answer?” [Laughter continues.]
Rick: “There’s a whole lot to it. Let me frame a couple of issues here:
“One, the difference between separate property and community property. So, certainly, at the time he got married, he had separate property. He owned the house and at least there was probably some equity based on the down payment he made at the time that was separate.
“Now, once that happens, and he starts to pay down that mortgage, that becomes community property because that was money earned while married, even if he was the only one working.
“So what he needs to do is go through a very thorough process called ‘asset tracing,’ trying to be able to paint the picture, and display that this is the amount of separate property that really should be exempted from her getting her hands on.
“Two, the other issue he was talking about is spousal maintenance, alimony. If I remember correctly, it was 2003 or 2004 that he got married, so we’re talking 14-15 years if she hasn’t been working and he has. Yeah, I’m expecting him to have exposure to spousal maintenance.”
Danny: “Jeez Louise, I thought I knew the answer to the house one, like, ‘That’s his!’ He had it before he was married, but that it’s accrued [value] since marriage, that’s the kicker. Alright.”
Who Gets The House?
Caller: “I was with a girl for over ten years. We’re still legally married. We bought a house and she put it in her name because of my credit rating. Now there’s equity in the house but we’re separated. Do I have a claim to half the equity of the house?”
Rick: “Hey, I finally get to give some good news. I always feel like such a downer. The good news is this: The fact that you were married and you purchased this home while married, it doesn’t matter that your name isn’t on the loan.
“The question comes down to, was there a significant down payment? And if so, did that come from community property or separate property?
“If I assume it was from community property, then we go forward and say, how was that mortgage paid? Again, I assume it was community property, which is any earnings the two of you have.
“So, even though you have to clear that first hurdle of demonstrating the presumption that just because it was in her name doesn’t mean it wasn’t community property.
“At that point, I do think you’re going to end up entitled to whatever half the equity is.”
Related Reading: Common Divorce Myths Debunked
A Shared Business Asset
Caller: “I’m getting ready to file for divorce and one of the assets is the house. I can’t afford the house on my own because I’d basically be ‘house poor.’ He makes three times the salary of me, but I also operate a business out of my home. In the home, there’s a detached garage in which I have an event space that I use. So I have to close my business unfortunately if he forces me out of the home.”
Rick: “There’s both a temporary division of assets and a permanent division of assets. On a temporary basis, the court isn’t going to boot you out of the home because it’s interrupting a cash flow that’s happening right now. So I fully expect you to retain possession of it while the divorce is pending. And then permanently, yes it’s an asset, it’s a widget, it’s a piece of property that has a value to it.
“Ultimately it’s about a spreadsheet analysis. You say, ‘To keep it I’d be house poor.’ What I don’t know is if you’d considered the fact that because there’s a significant difference in income between the two of you, that maybe you’ve got some spousal support coming in for a period of time that might help you with that.
“Or, the other thing is, maybe you exchange spousal support for a greater percentage of the assets. Which means you may walk away with greater equity or [be able to] pay down on the mortgage.”
Related Reading: Social Security and Divorce