Tracing Separate Property Contributions to Community Property

By George H. Norton, of Counsel, Lakin· Spears, and Garrett C. Dailey, President, Attorney's Briefcase, Inc.

Copyright (c) Expert Systems Publishing Company 1997-1999

Reproduced from commentary in Lawgic's California Marital Settlements

Summary: Property owned jointly by a married couple is not always purchased entirely with community funds. If the marriage dissolves, a spouse who contributed his or her separate property funds to purchase or improve community property may be entitled to be reimbursed for that contribution, if the contribution can be traced.

In a marital dissolution, when determining each party's share of the community property, attorneys should remember to inquire as to whether that party had any separate property that was used to acquire, improve or pay down the encumbrance against any community property assets. If so, then the party may have a right to reimbursement for those traceable separate property contributions pursuant to Family Code section 2640. Section 2640 (b) provides that "unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party's contributions to the acquisition of the property to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and shall not exceed the net value of the property at the time of the division."

This statute has been interpreted very broadly by the Supreme Court in In re Marriage of Walrath (1998) 17 Cal.4th 907, 72 Cal.Rptr.2d 856. The issue in Walrath was whether separate property contributions could be traced into subsequent properties when money was withdrawn from the initial property into which the separate property contribution had been made, and used to acquire the subsequent property. Walrath involved a refinancing, but its logic is equally applicable to borrowing against the equity in the asset and using it as security for a promissory note, as by way of a line of credit. In either case, if the party contributing the separate property can adequately trace the moneys through the assets, that party will be reimbursed for them, subject to the following limitations. The party seeking reimbursement must show what percentage of the loan proceeds traceable to each asset were based upon that party's separate property contributions. Thus, if the husband seeks reimbursement, he must be able to calculate the ratio of his separate property contribution to the original property's total equity at the time of refinancing and ascertain what portion of the loan proceeds represented his separate property contribution traceable to the new asset.

The first step in seeking reimbursement for separate property contributions to community property assets is always to be able to do an adequate tracing. The burden is squarely on the party seeking to do the tracing to keep adequate records. (In re Marriage of Stoll (1998) 63 Cal.App.4th 837, 74 Cal.Rptr.2d 506 [discussing difference in recordkeeping standards between context of commingled funds and context of separate real property transmuted into community property]; In re Marriage of Braud (1996) 45 Cal.App.4th 797, 53 Cal.Rptr.2d 179.) If you can't do the tracing, you can't be reimbursed. The next step is to understand that Walrath creates a deemed election by the party contributing the separate property to "roll over" a mathematically calculated portion of his or her separate property into the new asset acquired. The separate property contributor does not have the option, absent written agreement, to withdraw and reinvest only the community property or only the separate property equity. If the equity remaining in any of the assets into which the separate property is traced has insufficient equity to reimburse the separate property contributor, then the right to reimbursement of that portion is lost. It cannot be recouped from some other asset with more equity. (See Attorney's BriefCase California Family Law card FaRe 235.01; TRG: Family Law, 8:453.5; Adams & Sevitch, CFLP, §D.11.5.11; D.76.5.1, et seq.)