In California, all property acquired during the marriage is presumed to be community property. If there is a divorce, community property is split evenly between the parties. Property in this sense includes wages (and retirement funds) earned during the marriage, as well as physical things and real property (land and structures on the land).
Problems occur when community property is mixed with separate property. For example, one party buys a house before marriage and has a mortgage on it. After marriage, community wages are used to pay the mortgage, property taxes, upkeep, etcetera on the house. This is called comingling. Comingling occurs when a spouse’s separate property is mixed in or combined with the other spouse’s separate property or with community property so that the entire account is used for a community purpose. Now the couple divorces, and the community is owed a reimbursement for the funds provided. How much of a reimbursement usually will be determined by a process called tracing.
Tracing is a process of going through documentation to determine when and how comingling took place. With the separate property house, for example, the date of marriage would probably be used to determine the beginning of the comingling. Then other documentation, such as, cancelled checks and bank statements could be used to determine how much community property (funds) were spent on the separate-property house. The amount of reimbursement would be split evenly between the parties.
Property obtained prior to marriage, after separation, gifts, and inheritances are examples of separate property. When a spouse’s separate property is applied to community property, that spouse would be entitled to reimbursement from the community. For example, the community has a mortgage on a house, and one spouse inherits money. That spouse then uses the money to pay off the mortgage. Upon divorce, that spouse would be entitled to a reimbursement before the community splits any equity from the sale of the house.
Determining separate property and community property can be very difficult and should be handled experts either family law specialists and/or accountants.
Remember, keep written documentation, especially agreements between the spouses that can alter the presumptions of community and separate property.