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Characterization, Valuation, and Division of Community and Separate Property Assets

In California the general rule is that all property acquired during marriage is presumed community property. Exceptions are property acquired during marriage by gift or inheritance, or with separate property resources, like a spouse’s savings from before the marriage. For example, if a spouse had $20,000 in savings before marriage and buys a car with that money during the marriage, the car would be his or her separate property, if he or she could prove the money came from the pre-marital savings.

“Property acquired during marriage” may seem like a simple concept, but books have been written on this subject and many cases have analyzed what “property acquired during marriage” actually means.

Example: The Beauty Salon–Separate Property or Community Property?

What happens if a woman has a 1 chair beauty salon before marriage and she earns enough income to support herself? That salon is her separate property because she had it before marriage. What happens if before marriage she expands the salon to 4 chairs and earns even more income? That salon, 4 chairs and all, continues to be her separate property.

What is the character of the income she earns from that salon–her separate property–after she gets married? The character following marriage —community or separate property income — depends on whether the income is generated from her efforts during marriage—i.e. running the shop, hiring the employees, actually cutting or coloring hair, etc.–in which case the income would likely be community property.

If however the income is generated from the efforts of other people who work in the shop, without the wife’s efforts; that is, she rents chairs out to other stylists, she does not cut or color hair or perform other beauty related services, she could argue that all the income is her separate property because it came from a separate property source– the business she started and operated before marriage. The income was in existence prior to marriage, just like a stock portfolio that pays dividends or increases in value due to the market and not primarily and exclusively due to the spouse or partner’s efforts.

What happens if after marriage the wife expands the shop from 4 chairs to 10 chairs and then opens two more shops? Is the shop with 10 chairs community property? Wife would argue no, because it was started before marriage. Husband would argue that the shop increased from 4 chairs to 10 chairs during the marriage, so any increase in the value of the shop during marriage should be community property. He might also argue that the two other shops that opened during marriage are community property: However that would depend on the source of funds used to open those shops, and whether a spouse or partner worked or expended her efforts during marriage in opening and operating those two other shops.

Real Property; Other Assets

Residences and other real property “purchased” with a loan and an accompanying mortgage before marriage, may take on a community property aspect if the mortgage payments are made with community property—generally earnings during marriage –and the loan principal balance principal is reduced. There are methods and formulas to determine which part of the equity in the residence or other real property is separate property and which part of the equity is community property.

Other methods are used to determine whether stock options granted before marriage but vesting during marriage are separate or community property.

Forensic experts (accountants, business appraisers, and others) may need to be hired to assist the lawyer in his or her analysis, valuation and characterization of property as either community or separate. Forensic experts can be very expensive.

Proper characterization of property as community or separate, also involves determining the separation date– the date the spouses or partners “separated”–because generally, the property acquired post-separation is the separate property of the spouse who acquired it. All income from a spouse’s or partner’s efforts earned following separation generally is the separate property of the spouse or partner earning the income. The date of separation is also subject to somewhat complex and surprising rules, and can be a significant area of dispute.

Property characterization, valuation and division can be very complicated. Make sure you have an experienced family law attorney to assist you. If you need an experienced attorney for your San Francisco Bay Area legal matter or divorce please call us at (415) 749-5900 or write us using the form below for a free consultation.

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