Many couples purchase homes together prior to marriage without consideration for the potential consequences which could result if the couple later marries and divorces.
Likely, these couples will only discover the impact of seemingly innocuous real estate paperwork and escrow forms from a divorce attorney years later.
If you are considering purchasing a home with your significant other, it is crucial to first consult with an experienced family law attorney to understand your options.
For the majority of divorcing couples in California, the marital residence is the most significant asset they own. In the beginning stage of the divorce process, both sides will gather information and documents in order to ascertain the character of the residence (community property, separate property, or a mixture of the two), the character of any debt encumbering the residence, and whether either spouse has a separate property reimbursement claim.
The ultimate determination of how the house will be divided will be based on a number of factors such as date of acquisition, title, changes to title, and more.
In order to protect against unintended consequences, it is important to work closely with your real estate professionals and family law attorney prior to purchasing a home with a romantic partner and even after marriage.
Prior to marriage, many couples cohabitate and purchase real property. The most important step in this process is deciding how the title to the property will be taken. There are a few common scenarios that can lead to unintended consequences and should be considered. In all of these cases, the parties can retain experienced counsel to draft enforceable agreements which memorialize their intentions.
Prior to marriage, if a couple decides to take title in both of their names they will become equal owners of the residence. This is without regard to the amount each party contributed to a down payment, if any, use of a VA loan/benefits, source of funds used to make the loan and property tax payments, and source of funds used for any improvements or repairs.
There will also be a question of whether each party has a right to survivorship in the event of the other’s death. This will depend on the nature of the joint title taken.
In some cases, one party may provide all sources of funds for the down payment, monthly payments, property taxes, repairs, and improvements. In this scenario where joint title is taken, they are still only a 50% owner of the property.
Putting the other party on title may seem like a nice romantic gesture, but the paying partner should be prepared to share the property equally. If the non-contributing spouse is pursued by debt collectors, the IRS, or has a civil judgment against them, the real property could also be used as a source of funds to be collected upon.
If joint title to real property is taken during marriage, the real property will be characterized as community property. In the event one spouse contributed separate property funds to the down payment, improvements, or principal loan reduction, that spouse is entitled to reimbursement for use of the separate property funds.
Such reimbursements are not available in the same scenario prior to marriage absent a formal contract stating otherwise. In addition, if the parties do not intend for there to be a reimbursement of separate property funds to that spouse, a formal written waiver of those rights is required. It is much easier to negotiate and discuss each party’s thoughts and expectations regarding these transactions during the relationship and not upon divorce.
In another common scenario, one party owns a home prior to marriage, but refinances during marriage and puts their new spouse on the title. In this case, the spouse may have unintentionally transmuted their separate property asset to community property.
While rights of reimbursement remain, many spouses that own homes prior to marriage are very surprised to learn the interest their spouse has acquired in that home as a result of the refinance.
A premarital agreement, commonly referred to as a “prenup”, can provide certainty to unmarried couples purchasing real property. In addition, by taking the time to meet with a divorce attorney, you can get all relevant information needed to make an educated decision.
Common misconceptions regarding California community property rights are reflected in the following comments often made by family law litigants:
Scenario 1: “Even though we bought our house prior to marriage, we are married now so it should be divided equally.”
Scenario 2: “My name alone is on title to the house so it is entirely my separate property.”
Scenario 3: “We only put my spouse’s name on title because he/she had better credit, that shouldn’t matter.”
Communication is key when buying a house. You and your significant other should discuss expectations regarding each party’s interest in the house upon marriage and in the event of divorce.
By entering into a premarital agreement you can ensure that any agreements reached or understandings between the parties are legally enforceable.
Scenario 1: In the first scenario, a couple purchases a home prior to marriage but only one party is listed on title. Likely, the earning spouse qualified for and purchased the home alone even if both parties use the home as their primary residence and contribute to regular expenses.
Entering into a marriage, the home is the separate property asset of the spouse listed on title. This is true regardless of any separate property contributions made by the other spouse to a down payment, monthly mortgage payments, property taxes, improvements or repairs.
Scenario 2: As in the first scenario, only one spouse enters the marriage on title to property. Absent any other changes to title, upon divorce, that asset will be characterized as that spouse’s separate property.
However, if community property funds are used to pay down the principal owed on the loan encumbering the home, the community will begin to acquire an interest in the property.
As a general rule, all earnings of either spouse during marriage are community property. Therefore, even if the spouse on title only uses their income to make monthly mortgage payments, the community still acquires an interest.
Scenario 3: During a marriage, it is not uncommon to refinance a separate property home. In that event, many couples opt to add the new spouse to title for a variety of reasons. Often, spouses don’t even realize that title has changed or that a significant legal action has been taken.
During the refinance process, the focus is on getting the best interest rate or taking out equity. The parties are not often contemplating divorce and how the documents they execute at the refinance signing will impact characterization of the home. Executing an Interspousal Transfer Grant Deed during the refinance process and taking joint title may transmute a separate property home to community property.
This is often a hotly contested issue of fact where both parties have different recollections regarding the refinance process and the discussions had at that time.
Prior to marriage, future spouses can negotiate and execute a premarital agreement that sets forth all terms regarding any real property owned by the parties at that time or later purchased during the marriage. Many newly engaged couples are hesitant to discuss the idea of a “prenup” because it brings up uncomfortable discussions regarding divorce and could be viewed as illustrative of a lack of trust.
All married couples have a premarital agreement of sorts. Without a custom one executed prior to marriage, the California Family Code and California case law will control. The main problem that occurs when default laws control is that many people who get married are completely unaware of California community property laws which govern the actions they take before and after marriage.
Having frank discussions about financial expectations prior to entering into a partnership such as marriage can lead to a more healthy and open relationship and reduce conflict in the event of divorce.
Simply meeting with a family law attorney prior to marriage and discussing California community property law, title presumptions, rights of reimbursement, and transmutations can avoid some of the pitfalls discussed above.
With the knowledge of the legal consequences of actions taken during marriage, spouses can make more informed decisions regarding real property. In addition, if future spouses are not comfortable with the default community property laws and would like to change some of the provisions as they apply to them, such changes can be made with a premarital agreement.
If a couple is considering purchasing real property, but not planning on marriage, a cohabitation agreement or other contract that deals with the real property agreements between the parties is recommended.
If one party contributes to the down payment or monthly mortgage payments but does not go on title, it will be difficult to make any recovery of those funds in the event of a breakup. With a written cohabitation agreement, the parties can discuss and set up their expectations ahead of the nasty breakup.
California is not a “common law” state. In states that recognize common law marriages, parties that cohabitate for a minimum number of years with a romantic partner can begin to acquire marital-type rights.
In California, except for in very limited circumstances, couples that are not married and break up have no rights to support from each other or property division. In limited circumstances, a romantic partner may file a Marvin claim in civil court to recuperate “palimony” but those cases are very fact-intensive and difficult to win.
These “palimony” rights are not litigated in family court and are not governed by the family code. In addition, a romantic partner may have “tenant” rights if there is a landlord-tenant like relationship between the couple.
If you would like to learn more about premarital agreements, the California divorce process, child support, spousal support, child custody and visitation or property division, schedule a consultation with an experienced family law attorney at Cage & Miles, LLP. Our skilled attorneys can provide you with the knowledge you need to make informed decisions and protect your rights.