Does MOORE MARSDEN appy to IMPROVEMENTS we made to our RESIDENCE during marriage?

Q. I understand that Moore Marsden has something to do with reimbursing the community estate for the mortgage payments we made on the house my wife owned prior to our marriage, but we spent some the monies we saved during our marriage on improvements to the house. Do I get any of this back?

What Is the Moore Marsden Formula?

The Moore Marsden formula typically deals with what happens to the equity in property owned in the name of one spouse alone - in this case a house - where during marriage community property (i.e., either spouse's earnings) is used to make mortgage payments. Where these mortgage payments are a combination of principal and interest, and not interest only, their net effect is to increase equity by reducing principal. Over many years the amount of principal reduction can be substantial. In effect the spouse who solely owns that residence is benefiting by the community's contribution. This is potentially a kind of breach of fiduciary duty, giving rise to reimbursement rights. Over time this right of reimbursement to the community grows, but it only applies to increases in equity. There is no right to be reimbursed for interest, taxes and insurance payments. I have given an example of how these Moore Marsden interests are calculated here.

What About Transmutations?

Sometimes during marriage after a period of community payments on the separate property mortgage of one spouse, spouses or domestic partners transfer title to the property into joint names (often where there is a refinance and the lender requires it) so that now both spouses are on title to what was previously one spouse's separate property. This is called a transmutation. Under Family Code section 2581 the property is deemed "acquired" during marriage and so the house now presumptively becomes community property. Use our search engine to find more information about transmutations. Later, upon dissolution or legal separation these interests need to be separated out and accounted for. In such cases several levels must be analyzed:

First, a transmutation (adding a spouse to title to what was previously separate property) must be free and voluntary, and there is a presumption that the spouse who comes onto title did so through some form of undue influence. This may or may not at all be true, but it is the burden of the later titled spouse to establish the absence of undue influence. If there was undue influence, then the title change can be set aside and the property remains separate. If the title change is set aside, Moore Marsden applies because the property will be deemed to have always been the separate property of the first spouse but the community will still be entitled to a ratio of equity reimbursements.

If there has been a valid transmutation, then the first spouse is still entitled to be reimbursed for the value of their separate property contribution to the community (absent an express written waiver of this right of reimbursement). This is determined as of the date of the transmutation, and is governed by Family Code section 2640. Moore Marsden may still apply to determining the amount of this 2640 reimbursement. For example, say on the date of marriage Wife owned the property in her name and the mortgage owing is $100,000. Assume at the date Husband is added to title the mortgage has been paid down to $80,000. Also assume the value of the property remains the same at $200,000. Here there has been an increase of $20,000 in equity and the community must be reimbursed. On the date Husband goes on title $100,000 of the equity is Wife's pure separate property - the house was worth $200,000 and the mortgage was then $100,000. Wife is entitled to a 2640 reimbursement of $100,000. However, both H and W have a community interest in that $20,000 of principal reduction. Moore Marsden will be used to determine the value of each of their shares (often there has been a change of value between the two dates - assuming the house appreciated, then they also share in different proportions in the equity increase). Wife's $100,000 2640 reimbursement will be increased by her share of the community increase. If there has been appreciation, a ratio is determined that fixes the amount of community reimbursement due.

What to learn more about 2640 reimbursements?

What to learn more about transmutations?

Only Calculate the Moore Marsden Claim Up to Point of Transmutation

In contrast, if the mortgage had been interest-only up to the date of the transfer (with no capital improvements), then as of the date of this transfer the community would have no Moore Marsden reimbursement and Wife's 2640 claim would be 100% of the home equity on that date.

Once both parties jointly own the property, Moore Marsden will not apply to the increases or contributions that occur thereafter (unless there is a future transmutation back to one party or the other alone) although it may later be used as illustrated above to determine 2640 credits on the date the other spouse goes on the deed. This is because the formula is only used to value reimbursements to the community for mortgage debt payment - once parties are on title, the residence becomes community property subject to a separate property reimbursement instead of separate property subject to a community reimbursement. It still apples to determining the other party's 2640 reimbursement at the time of transmutation.

Moore Marsden and Residence Improvements

A common situation occurs when one spouse holds property in their name alone but the spouses together, or the other spouse, contributes monies to remodels or improvements. If the source of the improvements are the community dime, rather than the owner's SP, the value of those improvements may need to be reimbursed.

However, they are not reimbursed as part of a Moore-Marsden calculation. Moore Marsden reimbursements are limited to issues relating to reduction of debt on real property (mortgages), but also include a share of appreciation, as part of the "acquisition" of that property. Capital improvements are not considered an "acquisition."

Instead, a separate line of cases empowers courts to reimburse the community estate (of which each party owns one-half) for at least the dollar-for-dollar value of the contributions (i.e., installing an irrigation ditch: Marriage of Wolf (2001) 91 Cal.App.4th 962), but possibly for the enhanced value to the property that the improvements create, if that sum is greater than the out of pocket costs (Marriage of Frick (1986) 181 Cal.App.3d 997). Thus, the extent of the reimbursement may turn on whether those improvements actually increased the value of the home. If community funds are used to buy a solid gold toilet, that toilet may have little impact on the value of the home per se (the toilet is still worth whatever it is worth). Many improvements (or repairs) don't increase value. Another example might be an improvement that loses value over time, like new carpeting. This is to be compared with adding more square footage by enlarging the house. Expert testimony may be required to prove the improvements increased value and to what extent.

What happens when one spouse's SP is used to make some form of payment on the other spouse's SP, whether for mortgage reduction or improvements? It may well be treated as a gift. Marriage of Camire (1980) 105 Cal.App.3d 859.

And, what happens where the CP improvements for which a reimbursement right does exists were made prior to a transmutation, i.e., before the other spouse comes to be added to title? In those situations, the party who owned the separate property is entitled to a Family Code section 2640 credit for their equity in the property on the date the other becomes a joint owner. That will require a Moore Marsden calculation as of the transmutation date, but it won't take the CP improvements into account. Whether these get reimbursed at all would seem to depend on whether the property has continued to increase in value after becoming joint. It will be within that increase that the prior-to-transmutation improvements get reimbursed. If there is no increase, or even a decrease, then the community ultimately made a bad investment. Remember, these types of reimbursements only come from the asset itself, and not from some other unrelated property or asset.

Complicated? You bet. There are so many possible scenarios and it is hard to speak to these concepts except in generalities. Often a forensic accountant with Moore Marsden experience will need to be engaged. Since the fair market value of property may need to be determined at various points of time (for instance, the date of marriage, the date the new spouse comes on title, and the date of division), expert opinions of value of the real estate may also be required. It may be problematic to value property as of some long ago date.

My hope is here is to introduce you to the concepts so that you may be somewhat conversant with them. Find an experienced family lawyer to assist you! They will know local experts who can help with the analysis.

Here is a link to more articles discussing Moore-Marsden claims!

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Author: Thurman Arnold