CPAs are often called upon to provide clarity and precision in financial situations that are anything but straightforward. One recurring challenge in California family law involves the division of a marital residence that is owned by one spouse, often before the marriage, and had the mortgage principal reduced or value-enhancing improvements made during the marriage using community funds. (Note that the real property is not limited to a residence. It encompasses all real estate whether it is the marital residence, rental property, or other commercial property.)

In this context, community funds typically mean earnings by either or both spouses during the marriage, or the net proceeds from the sale of community assets. In California, the Moore and Marsden cases and their progeny provide the mathematical and logical framework for evaluating the respective community and separate property interests in such a home.

CPAs specializing in family law matters routinely apply the simple formula—that quickly becomes complicated, nuanced and unclear when encountering certain common fact patterns—to real estate properties that are the separate property of one spouse.

This article provides an understanding of the Moore/Marsden formula and identifies fact patterns that, when encountered, it is advised to seek help from a specialist. While the basic formula is mathematically simple, real-world fact patterns often introduce complications that require specialized expertise.

Legal Foundation

The foundational cases are Moore v. Moore (1980) 28 Cal.3d 366 and In re Marriage of Marsden (1982) 130 Cal.App.3d 426.

These decisions (and a line of about a dozen progeny cases) establish that if community property funds are used to reduce the principal of a loan on a separately owned home, the community gains a financial interest (not ownership interest) via a reimbursement of the principal reduction paid with community funds plus an apportionment of the appreciation of the fair market value of the house from date of marriage to the date of trial proportional to that principal reduction paid.

Mechanics of the Basic/Original Moore/Marsden Formula

The formula considers three main elements:

1. Separate Property Interest: Includes the down payment, loan principal paid before marriage, loan principal paid during marriage from separate property and, if any, appreciation attributable to that portion and pre-marriage appreciation.

2. Community Property Interest: Includes the mortgage principal reduction during the marriage (from community funds) and a proportionate share of any appreciation.

3. Outstanding Debt: Subtracted from the market value to determine the net equity.

Basic Formula: Community Share of Appreciation = (Principal Paid During Marriage from community funds / Total Principal Paid) × Appreciation

Total Community Interest = Community Share of Appreciation + Principal Paid During Marriage from community funds

In this hypothetical example, assume:

• Original purchase price (pre-marriage): $300,000

• Down payment (separate property): $60,000

• Mortgage at acquisition date: $240,000

• Mortgage balance at marriage: $220,000.

• Mortgage balance at separation: $120,000.

• Mortgage balance at trial: $118,000.

• Market value at date of trial: $600,000

• Mortgage principal paid during marriage: $100,000

Calculations:

• Total Principal Reduction during marriage = $220,000 – $120,000 = $100,000

• Community Ratio = $100,000 / $120,000 = 83.33%

• Appreciation = $600,000 – $300,000 = $300,000

• Community Share of Appreciation = 83.33% × $300,000 = $250,000

• Community Interest = $250,000 + $100,000 = $350,000

• Separate Interest = $600,000 – $350,000 – $118,000 = $132,000

• Equity at trial is $600,000 - $118,000 = $482,000, of which $350,000 is community and $132,000 is separate
  

Fact Patterns That May Require Adjustments

The straightforward application of the Moore/Marsden formula may not fit when any of the following occur:

• Refinancing(s) of the purchase money loan

• A distance in time between the date of purchase and date of marriage, i.e., pre-marital appreciation

• The property was rented out during marriage

• Decline in fair market value of property.

• Value-enhancing improvements

• Change in title (e.g., adding spouse)

• Co-ownership with third parties

• Third-party investment in the property

• Inheritance of property during the marriage

• Interest-only mortgages

• Other uncommon or complex scenarios

While the Moore/Marsden framework is conceptually straightforward, its real-world application can be highly fact specific. When unusual circumstances exist, consulting an attorney who is a Certified Family Law Specialist and an experienced family law forensic CPA is strongly recommended.