Couples going through a divorce in California must decide how to divide their property and debts—or ask a court to do it for them. Under California's laws, assets and debts spouses acquire during marriage belong equally to both of them, and they must divide them equally in a divorce. Here's what everyone filing for divorce in California needs to know about the state's property division laws.
Yes, California is one of the handful of states that follow community property rules. Most other states divide property at divorce using equitable distribution principles. Under community property rules, a couple's property should be divided equally upon divorce. (Cal. Fam. Code § 2550 (2022).)
Regardless of whether you and your spouse reach an agreement about how to divide your property, or a court handles it for you, there are three crucial steps to the process:
There is a strong presumption under California divorce law that all property—including real estate and personal property—a couple accumulates during the marriage is community property. Where the property is located doesn't matter; all that matters is that the spouses lived in California at the time they acquired the property. All community property is owned equally by the spouses. (Cal. Fam. Code § 760 (2022).)
Any property that isn't classified as community property is considered the separate property of one of the spouses.
California law defines "separate property" as:
(Cal. Fam. Code § 770 (2022).)
Separate property also generally includes items purchased with or exchanged for separate property, earnings on separate property, and any increase in the value of separate property, as long as the property owner can prove the claim with financial records or other documents. Separate property belongs to the spouse who owns it and usually is not divided in a divorce.
California law also provides that assets and debts spouses acquire between the day they separate and the day their divorce is official, is separate property. (Cal. Fam. Code § 771 (2022).)
The date of separation is not necessarily the date one spouse moves out of the marital home. Instead, it's the date that a "complete and final break" in the marriage has occurred, and is demonstrated by both of the following:
(Cal. Fam. Code § 70 (2022).)
The date of separation can become a big issue if, just before the divorce, one spouse earned an unusual amount of money—got a large bonus at work or won the lottery, for example—or spent a significant amount of money. When there's any question about the date of separation, the court will take into consideration all relevant evidence. For example, the judge might take into account the date the spouse moved out, opened a separate bank account, or even told their friends that the marriage was over.
A couple can agree in a prenuptial agreement or during marriage to change an asset that was originally separate property into community property, or vice versa. Such agreements must be in writing and must clearly state the intentions of the parties; simply changing the title of the property is not enough.
There are two main ways that separate property can become community property in California: by transmutation or by commingling.
It is possible for spouses to change the classification of property by agreement or by transfer. Changing the classification of property is called "transmutation." Such a change won't be valid unless it's acknowledged in writing by an express declaration that is accepted or consented to by the spouse whose interest in the property is adversely affected. (Cal. Fam. Code §§ 850-853 (2022).)
Sometimes a spouse changes a separate asset into a community asset without meaning to by combining—or "commingling"—separate property with marital property. A premarital bank account belonging to one spouse can become marital property if the other spouse makes deposits to it; a house owned by one spouse alone can become marital property (either in whole or in part) if both spouses pay the mortgage and other expenses.
The law presumes that commingled funds or property that's acquired during marriage is community property. If one of the spouses disputes this characterization, they must produce evidence showing that they didn't intend to convert separate property to community property. Spouses who can't decide what belongs to whom will have to let a court decide whether the commingled property was a gift to the marriage or whether the original owner should be reimbursed in whole or in part.
Many types of assets can be partially community and partially separate, including retirement accounts one spouse contributed to both before and after the marriage, or a business one spouse started before marriage and continued operating after marriage. Sometimes, the court will attempt to trace funds to sort out how much of an asset (or debt) belongs separately to a spouse.
Distinguishing community property from separate property can become very complicated, especially if one spouse owns a business or other asset to which the other contributed labor or funds during the marriage. If you have a complex property situation, you might need to consult an attorney for advice.
The spouses—or the court if they can't agree—assign a monetary value to each item of property. If valuation is left to a judge, the judge will consider evidence such as statements, expert testimony, appraisals, and the parties' financial disclosures to arrive at a value. The value of an asset or debt is determined as close as possible to the time of trial or hearing. (Cal. Fam. Code § 2552 (2022).)
Retirement assets can be challenging to evaluate and may require the assistance of an actuary, C.P.A., or other financial professionals.
Under California's community property laws, any interest or income accumulated in a 401(k), pension, military pension plan, or profit-sharing plan during the marriage is community property. How to split retirement accounts in divorce can be tricky.
Generally, pension plans are divided in one of two ways: a "reservation of jurisdiction," or a "cash-out."
This is the most common way divorcing couples handle pension plans. Under reservation of jurisdiction, the court orders that when the employed spouse retires, the other spouse will receive a percentage of each pension check. This percentage is calculated by dividing the years when the spouses lived together as husband and wife by the total number of years that the employed spouse has been participating in the pension plan. The result of that division is the community property percentage of the pension plan.
The other method of dealing with a pension involves obtaining actuarial evaluation or a "cash-out." An actuary is an expert who deals with statistical and financial evaluations of insurance policies, annuities, and pensions. By reviewing the plan description as well as the accumulations on the account of the employed spouse, the actuary can determine the present value of the community share of the pension plan. With a cash-out, the employed spouse receives the pension plan in its entirety, and the other spouse receives other community property assets of equivalent value.
In California, a couple's community property must be divided equally if there is no written agreement (such as a prenuptial agreement) requiring a particular division of property. A judge will subtract a couple's debts from their community property assets to determine the net community estate. In most cases, each spouse will receive one-half of the net community estate.
California community property laws don't require an "in kind" division of community property, which would mean you would have to divide each physical object. Community property division simply requires that the net value of the assets received by each spouse is equal—a 50/50 split of the value of the estate.
In some cases, one spouse is awarded the family residence, while the other spouse receives the family business and investment real estate. What matters under community property laws is that each spouse gets assets that are equivalent in value. If the total net value of the assets received by each spouse is equal, such a division is proper.
Keep in mind that separate property is not divided in a divorce. Separate property that a spouse owned prior to marriage or received through gift or inheritance belongs only to that spouse. Separate property can lose its separate character if it's mixed or commingled with community property. For example, if a spouse owned a rental home prior to marriage but used marital funds to remodel, furnish, and maintain the home, it may be considered community property in a divorce.
Under the divorce rules in California, spouses can divide assets by assigning certain items to each spouse, by allowing one spouse to "buy out" the other's share of an asset, or by selling assets and dividing the proceeds. They can also agree to hold property together even after the divorce.
Although continuing to own property together isn't a desirable option for most people, since it requires a continued financial relationship, some couples agree to keep a family home until children are out of school. Others might keep investment property, hoping that it will increase in value.
The couple must also divide all debts accrued during the marriage, including mortgages, car loans, and credit card debts, between themselves. Couples dividing debts should be aware that their separation agreement or divorce order is not binding on creditors, who may continue trying to collect a community debt from either spouse.
If the court assigns a debt to one spouse, the other can ask the court to put a lien on that spouse's separate property as security for payment of the debt. However, it's a better practice to try to pay off all the marital debts when the judge finalizes the divorce—if you're selling the family home or one spouse is buying the other out, there's often a refinancing of the house loan that provides an opportunity to do this.
When the amount of debt is greater than the value of assets, the debt that isn't taken care of by community assets will be assigned to each spouse however the judge deems "just and equitable." The judge must take into account the parties' ability to pay off the debt. (Cal. Fam. Code § 2622 (2022).)
Like any other asset, a business or professional practice must be considered in the valuation and division of community property. To the extent that a business or practice has been developed during the marriage, there is a community property interest that must be dealt with in the dissolution. The most difficult and time-consuming aspect of determining the value of a business or professional practice is in evaluation of goodwill. "Goodwill" is the intangible value that most businesses have, which is based on the expectation of future business, based on established name or reputation. If the business or practice is operated by one of the spouses, it has a goodwill value even if it could not be sold on the open market.
A spouse who has supported the other spouse in a business venture might wonder what community property rights they have in that business. Regardless of the amount of time or money poured by one spouse into the other's business, a business sown and grown during a couple's marriage will be considered California community property.
Business valuation is a detailed process. In rare cases, a judge may accept a couple's valuation of a business. More often, a certified public accountant or business appraisers will determine the value of a business or professional practice. The accountant or appraiser who is hired reviews the books and records of the business or practice and prepares a written report.
The judge has a lot of discretion in how to divide the business. They can order one spouse to buy out the other, but must first make a finding that they can't work together as co-owners. The judge could also award the business to one spouse and find a way to make it fair to the other spouse.
In divorces with kids, it is common for the primary custodial parent (parent with primary physical custody) to be allowed to live in the marital home with the children until the divorce is finalized. During that period of time, the spouse who lives in the home is usually required to make all mortgage, property tax, and homeowner insurance payments when due, although the other spouse may be required to make those payments if there's a major difference in the spouses' incomes and resources.
In some cases, a judge may award the marital home to the custodial parent permanently and offset that award by granting the other spouse a larger share of the marital estate. In other situations where a couple can no longer afford the marital home or there aren't minor kids, a judge will typically order the couple to list and sell the home and split any proceeds.
In California, when one spouse has earned a college degree or a professional license during the marriage, the other spouse has community property rights and is entitled to be reimbursed for the costs of acquiring the degree or license, with interest.
These costs are normally limited to such things as tuition, fees, and books. Unlike in other states, the law in California does not give the other spouse any right to a percentage of the enhanced earning ability of the spouse who acquired the degree or license. However, the court can take the enhanced earning ability into account when deciding alimony (spousal support).
Any loan that the spouse takes out for their education will be assigned to that spouse alone upon divorce.
(Cal. Fam. Code § 2641 (2022).)
The court considers the tax effect of dividing community property only when it will have an immediate, specific effect on a party's taxes. Otherwise, the court won't consider any effects in dividing community property during a divorce.
In general, a gain or loss isn't recognized for purposes of federal tax when it results from the transfer of property because of divorce. (26 U.S.C.A. § 1041(1)(2) (2022).) It's a good idea to consult with a tax planner or attorney to discuss the potential tax implications of a community property division, though, if you have any questions about how it could affect either your state or federal taxes.
Beloved pets are often the focus of heated discussions in a divorce. In California, one or both of the parties can ask the judge to decide custody of the family pet. The judge can assign sole or joint ownership of the animal. In making the decision, the judge must consider the care of the pet, including the prevention of acts of harm or cruelty, and making sure the pet has food, water, veterinary care, and safe and protected shelter. (Cal. Fam. Code § 2605 (2022).)