Community property and buying a home in California

What counts as community or separate property?

Except where a statute says otherwise, all property, real or personal, that a married person acquires during the marriage while domiciled in California is community property (Family Code § 760).

Separate property is the exception (Family Code § 770). It covers:

• property a spouse owned before the marriage;
• property received during the marriage by gift, bequest, devise or descent (inheritance);
• the rents, issues and profits of that separate property.

Spouses can change the character of a property, called a transmutation. It is valid only if made in writing by an express declaration that the spouse whose interest is adversely affected makes, joins in, consents to or accepts (Family Code § 852(a)). For real estate, it does not bind third parties without notice unless it is recorded (§ 852(b)).

Registered domestic partners have the same rights and duties as spouses (Family Code § 297.5).

Title options for spouses

Family Code § 750 lets spouses hold property in four ways, chosen on the deed.

Community property with right of survivorship must be expressly declared in the transfer document, and the spouses may accept it in writing on the face of the deed (Civil Code § 682.1(a)(1)). The section applies to instruments created on or after July 1, 2001 (§ 682.1(c)).

For a division at divorce or legal separation, property the spouses acquired during marriage in joint form, including joint tenancy and tenancy in common, is presumed community property (Family Code § 2581). The presumption can be rebutted only by a clear statement in the deed that the property is separate, or by a written agreement that it is separate.

Selling or refinancing the home

Either spouse manages community real property, but both spouses must sign any instrument that sells, conveys or encumbers it, or leases it for longer than one year (Family Code § 1102(a)). A spouse who did not sign has one year from recording to sue to set aside a sale signed by the other spouse alone, when the property stood in that spouse’s name only (§ 1102(d)).

Effect at divorce

Unless the spouses agree in writing or by oral stipulation in court, the court divides the community estate equally (Family Code § 2550).

Under Family Code § 2640, a spouse can be repaid separate money used for the home. Reimbursable contributions include the down payment, payments for improvements and payments that reduce loan principal. They do not include interest, maintenance, insurance or property tax payments. The reimbursement:

• requires the spouse to trace the money to a separate property source;
• is paid without interest or adjustment for inflation;
• cannot exceed the property’s net value at the time of division;
• is lost if the spouse signed a written waiver.

Example

Sam uses $100,000 inherited from a parent as the down payment on a home bought during marriage and titled to both spouses. The couple later pays down $50,000 of principal from their salaries. At divorce, the home’s equity is $450,000. Under § 2640, Sam is first reimbursed $100,000 (no interest). The remaining $350,000 is community property, split $175,000 to each spouse under § 2550. Sam receives $275,000 in total. The salary-funded $50,000 earns no reimbursement because it came from community earnings.

Effect at death

When a married person dies, one-half of the community property belongs to the surviving spouse and the other half belongs to the deceased spouse (Probate Code § 100). Without a will, the surviving spouse also inherits the deceased spouse’s half (Probate Code § 6401(a)). The deceased spouse’s separate property is shared differently: the survivor takes all of it, one-half or one-third, depending on which children, parents or siblings survive (§ 6401(c)).

When property passes to the surviving spouse by intestacy or by will, no probate administration is necessary, subject to the procedures in Probate Code §§ 13540 and 13550 (Probate Code § 13500).

The federal tax basis

The IRS explains that when a spouse dies, the total fair market value of the community property, including the survivor’s half, generally becomes the basis of the entire property, if at least half of the community interest is includible in the deceased spouse’s gross estate (Publication 555). In the IRS example, community property with an $80,000 basis and a $100,000 value at death gets a new basis of $50,000 for each half. The rule does not apply to registered domestic partners. A basis reset to market value reduces the taxable gain if the survivor later sells; see capital gains on a home sale.

Community property trusts

California applies community property by default, so the statutes cited here create no separate opt-in “community property trust”. What the Probate Code does address is community property placed in a revocable trust. Probate Code § 104 provides that community property held in a revocable trust described in Family Code § 761 follows the trust’s own provisions for what happens at death. Questions about a specific trust or deed belong with a California estate planning lawyer; see hiring a real estate attorney in California. For what the purchase itself costs, see closing costs in California.