In two previous posts, we discussed the very important Moore/Marsden formula, which is the formula that determines the community interest in real property when the community pays down mortgage principal on the separate property of another spouse. In the first post, we discussed the basic formula, while noting that in the age of the low interest rate, the basic formula is almost never used due to frequent refinancing. In the second post, we discussed how the formula applies to improvements. In this post, we will address one of the most common adjustments that need to be made to the formula (that usually occurs after a refinance): How do you calculate the community interest in one spouse’s separate property after the other spouse is added on title?
Let’s use an example. Wilma purchased a home in 1999 for $300,000. She put $50,000 down and got a loan for $250,000. She marries Harry in 2002, and now the home is valued at $400,000. In 2003, with house valued at $450,000, the house is refinanced. To get a better interest rate, Harry is added to the loan and is added to title. As of the date Harry is added to title, there is $230,000 in equity, with $10,000 of principal paid down with community earnings during the marriage. The parties divorce in 2016. The loan is entirely paid off and the home’s current fair market value is $550,000. What is the community interest in the home?
The fact pattern presented here is very close to the fact pattern in Marriage of Kahan, and in one succinct paragraph, the Court explained exactly what to do:
“The Legislature has expressed that the measure of this reimbursement is to be determined by the value of the separate property interest at the time of the conversion to the joint tenancy form of title. (83 Sen. J. (1983 Reg. Sess.) pp. 4865-4867.) This would require a determination of the fair market value of the property at the time of the conversion to joint tenancy on October 27, 1970, less outstanding encumbrances and less any community property contributions prior to the conversion. In this case community property contributions would include amounts paid on the principal loan balance, as well as on those loans borrowed by the couple for the purpose of improvements, and any other payments for improvements out of community funds. (Civ. Code, § 4800.2.) In addition, the community will have acquired a pro tanto share of the appreciation of the property from the date of marriage to the conversion date, based on the formula set forth inIn re Marriage of Moore (1980) 28 Cal. 3d 366 [168 Cal. Rptr. 662, 618 P.2d 208], as modified in In re Marriage of Marsden (1982) 130 Cal. App. 3d 426, 437-440 [181 Cal. Rptr. 910]. Any equity increase in the property due to appreciation after the date of conversion is attributable to the community under section 4800.2.”
Put another way: The equity in the home at the time the other spouse is added to title minus the Moore/Marsden interest up to that point is the reimbursement owed to the spouse who first owned the property. Any equity increase afterwards belongs solely to the community.
Going back to our example, at the time Harry was added to title, the equity in the home was $230,000. To calculate the Moore/Marsden interest, we use the basic formula from the date of marriage to the date Harry was added on title, which would like this:
Step 1: The community receives a dollar for dollar reimbursement for pay down of principal.
Step 2: In addition to the reimbursement listed in Step 1, the community gets a pro tanto share in the marital appreciation of the home calculated as follows:
The appreciation of the home between the date of marriage and the date the second spouse is added on title, multiplied by the following fraction:
Numerator = Community property payments of principal.
Denominator: Purchase price of the home.
Using our example with Wilma and Harry, the application of the formula would look like this:
$10,000 + ($50,000 * [$10,000/$300,000]) = A Moore/Marsden interest of $11,666.67 as of the date Harry was added to title.
Therefore, $230,000 – $11,666.66 = $218,333.34. This is the Family Code section 2640 reimbursement Wilma is entitled. The rest belongs to the community. In our example, the current equity in the home is $550,000. Wilma is entitled to the first $218,333.34, and the rest of the equity, $331,666.66, belongs to the community and is split between the parties ($165,833.33 to each party). So in the end, Wilma gets $218,333.34 + $165,833.33 = $384,166.67 and Harry gets $165,833.33.
Feel free to contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child custody and visitation. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.