What Happens to the House during divorce in California

Hey, everyone. This is Scott Levin, attorney mediator in the world of family law. And I'm here with a good friend of mine, Raina Davidson. Hi, Raina.

Hi, Scott. Thank you for having me.

Raina, can you introduce yourself for a moment so people know what you do and how you help them as a certified divorce financial analyst and financial expert?

Yeah, absolutely. So I am a CPA. I work as a holistic financial planner at a wealth advisory firm in Rancho Santa Fe. As Scott mentioned, I also have my CDFA or Certified Divorce Financial Analyst designation, which means that I help clients through their divorce understand their finances, whether it be doing separate property tracings, pension valuations, full-on lifestyle analyses, and then also doing post-divorce transition assistance for their finances, really helping them understand how their settlement options will impact their finances in the future. And if they need help investing that at the end of their divorce, can go back on the wealth advisory side and provide advice there.

Yeah. Raina has, in her knowing each other for a while, she kind of helps clients understand what their settlement impact will be on day 1. But that's not the only time period you want to look at, right? It's day 1, it's year 3, it's year 5. You have to kind of project forward to make sure that you know, the terms of the settlement and the support and everything that you guys are discussing is going to be workable for you. The last thing you want to do when you do a divorce and you settle on something, that is to find out that it's not workable.

And absolutely. And I think it's really hard for clients to even be able to make a decision during their divorce when they don't have clarity on what those long-term impacts will be. So having those discussions while they're in it hopefully can allow them to make more informed decisions. allow them to better understand what they can negotiate and what they can't during their divorce because they know what the long-term impacts may be.

Totally. Okay. So today's topic is a good one. It's one that comes up in almost every divorce mediation that I work on. It's issues with the marital home during divorce. So there's kind of 2 key points that we're going to highlight today. Let's say that you're working— it doesn't matter if you're litigating or mediating, but you're in a California divorce. You guys, you and your spouse have a home. And let's say that one of you or both of you might have put down your own deposits into the home at that when you were buying it, and that those came from separate money accounts. Like, I had this money from inheritance that I used to put into the home down payment, or I had this bank account with these funds in it, or this 401. Before marriage, so it's separate property putting into the down payment. So now you have separate property into a home, but the home is also community and jointly owned. Another scenario could be like if one person owns a home prior to marriage, but then you kind of live there and it becomes part separate, part community if you're kind of doing the payments during the marriage. So how do you handle separate property interests in a community property home, Raina?

Yeah, absolutely, Scott. So I think maybe the more simple situation would be the second one that you mentioned, where, you know, especially now that people are getting married maybe a little bit later in life, maybe they put a down payment on a property and then before the marriage, and now they're entering into the marriage, and after that, then from both incomes and joint income, they're, they're making those mortgage payments. So in that case, That separate property down payment that we'll just say, let's say the man put down, that will remain separate property. So that separate property and then appreciation throughout the marriage on that portion will continue to be separate. And so basically what needs to happen is there's this formula, and in California it's called Moore's Marston, is the accepted formula. That basically looks at what contributions to the property were made from separate interest, and then what portion of the home, your equity in the home, was derived from marital, like a marital portion. So there's kind of a standard calculation there. And Scott, you, you know, mentioned it exactly right. If you have funds even during the marriage that you're contributing, but say you received an inheritance, during your marriage, you kept that inheritance in a separate account. And let's say you put, you know, $50,000 of that inheritance towards the principal of your mortgage. That is your separate property interest, even though it was made during the marriage.

Yeah.

So again, this formula is going to take all of the separate property interests in the home, compare that to, you know, what the marital portion is, and also make a pro rata, you know, Appreciation, like allocate appreciation on the home to those separate property and marital property interests. So at the end, you know exactly what's marital, and then the marital portion is going to— is what's going to be split 50/50, and the separate portion would stay separate.

And then, you know, why, why my clients engage Raina is because the math is the math, right? You get someone to do the math. There's no bias in the math. My clients hire, you know, the CDFA together. So it's just in the spirit of mediation. But Raina, of course, you know, works also in the world of litigation and, or, you know, even advises people if they're considering going divorced, how's my financial outlook look? What's going to happen with the house? So she can just, you know, advise people. But the math is the math. And that's why it's really important to get someone involved that can do that math and understands the law. So that you get the right answers. Another thing, we only have a couple minutes left, but that we want to talk about is, you know, the issue of refinancing a mortgage right now. Obviously, in the interest rate climate that we're in, all my mortgage professional friends are telling me that the rates are going to come— be coming down. But if they knew, they would all be billionaires, right?

So we all want that crystal ball.

Yeah, so so what's gonna ha? So a lot of my clients, they they they there is a buyout technically of a home during a divorce, but can the person refinance to remove the person being bought out from the home off the loan? A lot of times in this climate, they can't because the interest rates are so much higher than their current loan amount. So Raina, walk us through the issue of refinancing a primary property in the world of divorce.

Yeah, absolutely. So I know, you know, in my own situation, buying a home a couple years ago, our interest rate is 3%. If we wanted to buy the same home now, it's going to be closer to 7%. So during divorce, if one spouse wants to keep the home, number one, we always want to determine if that's even a financially feasible decision to make. Oftentimes, you know, especially the wife, You spend so much time maintaining and making your home beautiful, and you want to maintain that consistency for the kids. So holding on to that home is something that's really important. But we need to evaluate if that's a financially smart decision.

You got to make a business decision, not just an emotional decision.

Exactly. So when one spouse maintains the home during divorce, the other spouse wants to get off of the mortgage, number one, because they might want to qualify for their own mortgage going forward, and they don't want their credit to be tied to that property anymore in the event that the resident spouse isn't able to make those payments. And so that's why the refinancing occurs, is because they're trying to get the one spouse off and so that the resident spouse is now, you know, the legal owner and has the liability.

Yeah, exactly.

So with that, because interest rates are so high, we definitely have some availability for creative solutions. You know, when— if the resident spouse is able to make payments for 12 months out of their separate property, that allows the spouse who maybe still be on that property, you know, in legal title or on the mortgage, not have to consider that as part of their debt when they're requalifying for another mortgage.

Yep.

If there is spousal payments involved, spousal income, Spousal payments received have to be received for 6 months before they can qualify for income when refinancing. So there's a couple of things there, but also creative settlements as far as having both spouses stay on the property so that one spouse isn't required to refinance at these extremely unfavorable rates right now. And you're going to put language in the agreement to protect both spouses. Sure. If both are staying on the mortgage, that's good. So one spouse, that's the nonresident spouse, will want to make sure that those mortgage payments are getting made on a monthly basis.

And what happens if they're not? There has to be consequences, like you know, then it has to be sold or refinanced.

But exactly.

Well, Rina, thank you so much for your time today, and this was really helpful. We're going to do more of these videos. You can tell that she's. Tremendously experienced, knowledgeable, and I'm just thrilled that we could, we could record this, and we'll continue to do some more.

Well, thank you so much, Scott. I will come back anytime.

All right, talk to you soon.

Thanks.