Tracing the Money When You Sell Pre-marital Separate Property During Marriage

Darryl owned a piece of real estate in London while he was single (which is why excerpts from the opinion below make reference to English Pounds rather than U.S. Dollars). He married Tracey. They lived together in the London property. Then during the marriage he refinanced, and eventually sold, that property. As part of the refinance Tracey's name was added to the title on the property, and the refinance monies and sales monies were deposited into a joint bank account and later used to buy and improve other property. When they split up, Darryl wanted to be reimbursed for the value of the London property he owned before marriage, and the loan proceeds. At trial he could not adequately prove the value of the London property when it was sold, and he could not show that it was only the London property portion of the money in the commingled account that was used for the other properties. Does he win? No. The unpublished opinion is helpful because it shows us what kind of transactions can be reimbursed, and also explains the process — called "tracing" — by which you deliver the proof to support the reimbursement. Generally, where the family residence was originally the separate property of one party only, and converted to joint tenancy during marriage, the measure of reimbursement is the fair value of the residence at the time of conversion, less outstanding encumbrances and any nongift community property contributions to principal before conversion. (In re Marriage of Walrath (1998) 17 Cal.4th 907, 920-921, fn. 5.) In In re Marriage of Walrath, the Supreme Court held that a section 2640 reimbursement claim includes not only the specific community property to which the separate property was originally contributed, but also any other community property that is subsequently acquired from the proceeds of the initial property, and to which the separate property contribution can be traced. (In re Marriage of Walrath, at pp. 918-919.) The Walrath court also determined the method to trace separate property contributions through multiple properties. (In re Marriage of Walrath, supra, 17 Cal.4th at p. 921.) The Walrath tracing method was not used here because the trial court assumed that the £150,000 withdrawn from the Spencer property after refinancing was husband's separate property, and unlike Walrath, these funds were commingled with community funds in the couple's Bank of America account. (Id. at pp. 920-921, fn. 5.) Commingling does not alter the status of the separate property interest despite the presumption that property acquired during the marriage is community property (§ 760) as long as the contribution can be traced to a separate property source. (In re Marriage of Cochran, supra, 87 Cal.App.4th at pp. 1057-1058.) The spouse claiming the separate property interest must prove that he or she used separate property funds to purchase the community asset. If the spouse cannot make that showing, the property is characterized as community property because it was acquired during the marriage. (§ 760.) While the general rule is that the testimony of a single witness is sufficient to support a finding, there is a heightened evidentiary standard to rebut the presumption that property acquired during marriage is presumed to be community property. (In re Marriage of Mix (1975) 14 Cal.3d 604, 610-611, 613-614.) When a spouse has commingled separate property funds with community property funds, and at dissolution the spouse seeks to trace a particular expenditure to the separate property funds, the courts require more than the spouse's testimony that he or she intended to use the separate property funds in the commingled account for the expenditure. (Id. at p. 614.) The spouse is required to present the court with evidence (apart from a mere statement of intent to use separate property funds). Courts recognize either direct or family expense tracing methods to ascertain whether a party's contribution was derived from a separate property source. (See In re Marriage of Walrath, supra, 17 Cal.4th at pp. 920-921, fn. 5; In re Marriage of Mix, supra, 14 Cal.3d at p. 612.) Under the "direct tracing" method, the disputed asset is traced to the withdrawal of separate property funds from the commingled account. (In re Marriage of Braud, supra, 45 Cal.App.4th at p. 823.) "This method requires specific records reconstructing each separate and community property deposit, and each separate and community property payment as it occurs." (Ibid.) Separate property status cannot be established by "mere oral testimony of intent" or by "records that simply total up all separate property funds available during the relevant period and all separate expenditures during the period[.]" (Ibid.) Using the "family expense" method, the records must show the community income was exhausted by family expenses, leaving only separate property funds available to make the payments. (In re Marriage of Cochran, supra, 87 Cal.App.4th at pp. 1058, 1059.) Estimates are not sufficient to meet this burden. As you can see, it is not as simple as saying "it's mine." The courts require specific evidence, purusant to specific methodologies, to prevail on a reimbursement argument. That specific evidence is usually present by an accountant with special expertise in divorce work. 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