COURT UPDATE: Property Taxes & Mortgage Interest Not Reimbursable in Property Division
A new case, Marriage of Nevai, coming in the waning days of 2020, provides some clarity on reimbursements where community funds are used to acquire or improve a spouse’s separate property.
The facts of the case are brief. Husband and Wife were married in February 2003. They had one child together. Husband and wife separated in August 2015. The trial occurred in September 2017.
Wife had a cabin in Lake Tahoe that she bought before the marriage. Joint funds were used to pay down the mortgage, property taxes and remodel the home. At trial, Husband sought a reimbursement for the community’s investment in the cabin that included not only principal contributions and a pro tanto interest in the appreciation of the value of the cabin, but also reimbursement for mortgage interest and property taxes paid. The trial court sided with Husband.
The California Third Appellate District overruled the trial court in how it reimbursed Husband for mortgage interest and property taxes paid on Wife’s vacation home.
“Where community funds are used to make payments on a property purchased by one of the spouses before marriage, ‘the rule developed through decisions in California gives to the community a pro tanto community property interest in such property in the ratio that the payments on the purchase price with community funds bear to the payments made with separate funds.’ [Citations.] This rule has been commonly understood as excluding payments for interest and taxes.” (In re Marriage of Nevai (Cal. Ct. App., Dec. 29, 2020, No. C086584) 2020 WL 7706261, at *5.)
Source: Sindre Strøm
Citing the seminal Moore and Marsden cases, the Court noted that the only components of a reimbursement claim for community investment in separate property is the pro tanto interest awarded to the community along with reimbursement for community funds used to reduce the mortgage principal or improve the property during the marriage. ((In re Marriage of Nevai, supra, at *5.)
In other words, the community payments are similar to an investment and create a present property interest. The concept of a “pro tanto” interest may seem obscure, but is calculated simply. The following principles apply. First, the separate property estate is credited with both premarital and postseparation appreciation in the value of the property. Next, the community's contributions to equity are considered. Finally, the community's interest in the property, expressed as a percentage, is multiplied by the appreciation in the property's value during the marriage.” (In re Marriage of Nevai, supra, at *5, citing Bono v. Clark (2002) 103 Cal.App.4th 1409, 1425.)
Expenditures for interest and taxes simply are not included when calculating the community's interest in the separate property. Such payments neither “contribute to the capital investment” nor “increase the equity value of the property.” Instead, expenditures for interest and taxes are more properly considered as “expenses incurred to maintain the investment.” Because they are not assets or debts of the community, they may not be considered by the court at dissolution. (In re Marriage of Nevai, supra, at *5.)
The end result for Husband in this case was that he was not awarded in his column one half the value of the mortgage interest and property taxes paid towards the cabin, as refracted in the calculus of a Moore/Marsden calculation.
Husband was caught flat-footed in his case – you should not. Reimbursement claims are NOT straightforward, as they rely on both a large and ever-changing body of statutory and case law. Often a law firm needs to work with a forensic accountant to properly calculate the reimbursements and community versus separate property components of a home. If you want to come out on top of negotiating a reimbursement claim, get legal help immediately. Calendar a free initial consultation with the Law Offices Jane Migachyov now.