Is It Community Property Or Separate Property?

The 9th Circuit really confused a lot of people in 2003 when it incorrectly interpreted California community property laws. The confusion spread to California courts of appeal until finally corrected by the California Supreme Court in 2014!

In Hanf v. Summers (In re Summers), 332 F.3d 1240 (9th Cir.2003), the pertinent facts are as follows: Husband, Wife and Daughter bought real property and titled it as joint tenants. The bankruptcy court held that the property was held in a joint tenancy! The BAP affirmed, and the 9th Circuit affirmed the BAP.

The basic idea was since the property was titled as joint tenants, the property was owned as a joint tenancy. The problem with this is that Cal. Fam.Code § 852(a) provides that “[a] transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.”

So there you have it, the property is community property because the parties did not have an express declaration otherwise. But that is not how the Circuit Court decided this case. It held that § 852 has historically only been applied to inter-spousal transactions and so it did not apply to the facts of this case due to the parties having bought the property from a third party.

Since most spouses purchase their first home after marriage, this holding had the practical effect of making virtually all post-marriage purchases of real property a joint tenancy instead of community property. It is difficult to understand why the Circuit court would believe this was something the legislature would have intended particularly when the 1984 amendments were made to prevent exactly that!

Now the law as it stands today, according to In re Marriage of Valli (2014) 58 Cal.4th 1396, 1400:

Property that a spouse acquired before the marriage is that spouse’s separate property.

Property that a spouse acquired during the marriage is community property unless it is:

traceable to a separate property source;
acquired by gift or bequest; or
earned or accumulated while the spouses are living separate and apart.
Finally, spouses may change the character of property during the marriage by what is called a “transmutation.” To do so, they need to comply with § 852 even if the property is purchased from a third party.

The Valli Court was critical of the 9th Circuits holding, stating that “There, the federal appellate court was attempting to construe and apply California law ‘to determine whether the requirements of California’s transmutation statute . . . must be met when realty is transferred from a third party to spouses as joint tenants.’”

It further criticized the Court’s holding as “not persuasive insofar as [it] purport[s] to exempt from the transmutation requirements purchases made by one or both spouses from a third party during the marriage.” The California Supreme Court did not think the 9th Circuit’s rationale reconciled the exemption with the state legislatures purpose in enacting § 852.

The court went one step further and said that in so far as Evidence Code section 662, which states that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title,” applies to a situation, it does not apply when it conflicts with transmutation statutes.

The Court left open whether § 662 can ever apply to marital dissolution proceedings.

The concurring opinion is a work of art but too long for me to go over. I highly recommend it to anyone who would like a deeper understanding of the subject matter. You can find it here.

Note: This is important, not only in bankruptcy proceedings and marital dissolution proceedings but also for tax purposes. If the tenancy is a joint tenancy, then upon death, only the deceased spouses “share” of the property will have a step up in basis. If held as community property, then the whole property receives the benefit of a step up in basis.