–by Sam Darling, Divorce Lawyer at Genesis Law Firm
Heated disagreements in Washington State divorces often boil down to whether an asset should be characterized as community property or separate property. This is because courts usually award each spouse ALL his or her separate property, but only HALF the community property and NONE of the other spouse’s separate property. For those hoping to better understand property characterization, you have come to the right place. This article provides a detailed description of the relevant laws—perhaps the most detailed free description available. In fact, if you read and understand this article, you will probably know more about property characterization than do many lawyers. The first several sections below explain the basic principles, followed by increasingly complex principles and examples. Our law firm has also published separate articles on Property Division in Washington Divorces and Disproportionate Awards of Property, which you can find by clicking the links in this sentence.
1) Basic Definitions. As the names imply, community property is what spouses own together as a marital community, and separate property is what each spouse owns individually.
The date of acquisition usually determines whether something is community or separate in character. Assets and debts acquired during the marriage are usually community property, and assets and debts acquired before or after the marriage are usually separate property. For example, a husband’s wages earned during the marriage are community property, and his wages earned after the marriage are separate in character.
Courts presume property is community in character unless proven otherwise.
2) End of Marriage. For purposes of property characterization, a marriage ends when the spouses INFORMALLY separate. Informal separation occurs when the spouses stop living together with the intent of remaining a couple, or when one of them petitions for divorce or legal separation, whichever happens first. For instance, informal separation might occur when:
- A spouse moves out of the family home with the intent of ending the parties’ relationship;
- The parties continue living together but divide their assets and liabilities and agree their relationship has ended;
- The parties are living separately and one of them says the relationship is over; or
- One of the parties petitions for dissolution (divorce) or legal separation.
Of course, many married couples break up and reconcile multiple times. Courts typically ignore all but the final breakup.
3) Gifts. A gift can be an exception to the general rules of property characterization. An asset given to one spouse rather than to both spouses is the separate property of the recipient, regardless when it occurs. But the recipient bears the burden of proving the gift was to only one spouse rather than to both. Proof of the intended recipient can be assumed based on the circumstances. For example, the court might assume a family heirloom from the husband’s parents was intended as a gift to the husband. Rightly or wrongly, judges often assume gifts from one spouse’s side of the family are to that spouse.
4) Inheritances. Washington treats inheritances the same as gifts. An inheritance to one spouse is that spouse’s separate property, regardless when it occurs. Unlike gifts, there tends to be little argument whether the inheritance was to one spouse or both spouses. Documentation, such as a will or court papers, usually makes the intended recipient clear.
5) Quasi Community Property. Washington courts sometimes use the term ‘quasi community property’ as a reference to non-community property that should be treated as community property. Quasi community property comes in two types:
- Assets or debts from outside Washington that would be community property if located within Washington’s borders; and
- Assets or debts acquired when the parties were living like a married couple but were not technically married.
The latter category warrants further explanation. Couples often live together outside wedlock—perhaps prior to marriage. For purposes of property characterization, courts say property acquired during this time is quasi community property if the parties were living like a married couple. In determining whether the parties were living like a married couple, the judge may want to know whether they were romantically involved, commingled their incomes, and sharing expenses. If so, the unmarried couple is said to have been in a ‘meretricious relationship’, ‘committed intimate relationship’ (CIR), or ‘marital-like relationship’. All three terms mean the same.
6) Tracing. Proceeds from the sale of an asset retain its original characterization. For example, assume a wife bought a car prior to marriage. The car would be her separate property. Then assume she sold the car DURING marriage. The proceeds would still be her separate property, even though she acquired them during the marriage. Then assume she bought a couch with the car sale’s proceeds. The couch would be her separate property as well. This is called ‘tracing’.
When a party claims an asset acquired during marriage traces back to separate property, he or she bears the burden of proving its traceability. Otherwise the presumption of community property governs.
7) Commingling. ‘Commingling’ is the opposite of tracing. Commingling occurs when spouses mix their community property and separate property in ways that render the separate property impossible to trace. When this happens, the entire mixture becomes community property.
The classic example occurs when newlyweds pool their money in one bank account. Assume the parties each put $5,000 of their premarital earnings into an account, for a total balance of $10,000. At first the $10,000 of pooled funds are separate property, earned prior to marriage. But then the spouses deposit their earnings from during the marriage (community property) into the same account. Now the account contains separate and community funds. Notably, the separate funds would still be traceable at this juncture, because the court could ascertain that $10,000 of the current account balance came from separate property. But what if the parties begin spending from the account on everyday expenses? That is when traceability usually becomes impossible. Generally the court has no way of knowing whether the expenditures were from the separate funds or community funds. Consequently the court would be unable to determine how much in the account is separate in character. Though unfair in some eyes, the entire account would become community property.
Thankfully courts tend to soften this rule by erring on the side of traceability, especially when dealing with large separate property values. For instance, if a wife deposits $300,000 in separate funds into the parties’ joint account for a month and they spend money from the account in the interim, the court would still probably consider the $300,000 traceable.
8) Improvements. When a spouse (or both spouses) improves the value of an asset, the increased value reflects the character of whatever brought about the improvement. This rule is difficult to understand as a general principle, but makes intuitive sense in context. Consider the following example:
- A husband builds a second wing on the family home during the marriage. The materials cost $10,000, which the wife pays from her premarital earnings (separate property). The second wing improves the home’s value by $100,000. Ten-thousand dollars of the improved value would be the wife’s separate property, because it traces back to her premarital earnings. The other $90,000 of the improved value would be community property, because it derived from the husband’s work during the marriage.
9) De Minimis Exception. The court tends to disregard small improvements when characterizing property. This is called the ‘de minimis’ exception. De minimis is a Latin term meaning “the impact is small enough to ignore”.
10) Repairs & Routine Maintenance. The court also tends to disregard repairs and routine maintenance when characterizing property. For example, the court would probably overlook whether the spouses fixed a toilet in the family home. One might think of this in the same way as the de minimis exception. The lower the value and cost of the work, the more likely the court is to disregard it.
11) Split Characterization. Property can be partly community and partly separate in character. Consider the following example, which fits a common fact pattern:
- Newlyweds purchase a $300,000 home. The $30,000 down payment comes from the wife’s premarital earnings (her separate property). The parties take out a mortgage for the remainder of the purchase price. Because of the wife’s down payment, ten-percent of the home is her separate property ($30,000 / $300,000 = .10). The other 90% of the home is community in character, as is the mortgage obligation.
12) Appreciation. When an asset appreciates, the increased value retains the asset’s proportionate character. Consider the following extension of the previous example:
- As you know, the wife has a 10% separate property interest in the family home. The other 90% is community property, as is the mortgage. The house appreciates overnight by $100,000 (perhaps because the parties found gold on their land). After the appreciation, the house is still 10% separate property and 90% community property.
13) In Whose Name. For characterization purposes, it makes little difference whether an asset or debt is in one spouse’s name, the other spouse’s name, or both names. For example, the court will usually disregard whose name is on a car’s title. Similarly, courts pay little attention to the name(s) on a deed, bank account, or mortgage. This is because spouses often put assets and debts in whoever’s name makes practical sense at the time rather than as an indication of who should receive the property in a divorce. They might quitclaim the house to the wife to get a better interest rate on a mortgage refinance. Or the husband might put the family cars in his name for simplicity. The court usually looks past the names and applies the other rules stated in this article.
14) Refinancing. Refinancing a mortgage or loan typically does not impact characterization. The loan generally takes on the same character as its predecessor loan, and the encumbered asset’s character remains the same as well.
15) Mortgage Payments on Family Home. For purposes of characterization, judges usually disregard who pays the mortgage on the family home. Like several other rules listed above, this principle makes more sense in context.
Consider the following scenario: the spouses live in a home the husband acquired prior to marriage (his separate property). He then makes the monthly mortgage payments with his earnings from the marriage (community property funds). Here, the community would not acquire a community property interest in the home, even though community earnings paid down the mortgage balance. The reason is that the marital community lives in the home, which has a rental value. The rental value of a home roughly offsets the mortgage payment.
16) Mortgage Payments on Second Homes. To the extent the payor used the second home for vacations, the rental value should offset the mortgage payments. The court would disregard who made the mortgage payments. Similarly, spouses often rent out the second home to others. If the home’s rental income pays its mortgage, then the court again ignores the payment in its characterization.
But what if the parties neither use the home themselves nor rent it out? The outcome becomes unpredictable and largely dependent on each party’s ability to argue the equities of his or her case. Courts sometimes hold that the mortgage payments are a gift from the payor. Other times the court characterizes a portion of the home’s equity as belonging to the payor.
17) Rental Income & Dividends. Passive income from assets, such as rental income and dividends, usually take the character of the assets from which they derived. For example, a rental home’s rental income typically takes the character of the home.
18) Characterization of Small Business. Characterization of a small business’s income and value follow the same general standards listed above, but it presents a unique challenge. Courts characterize small business income and appreciation using the following specialized rules:
- Characterization of Passive Small Business Income. If the business generates income passively (meaning it produces income without either spouse having to do much), the income takes the character of the business. For example, a wife owns a coffee stand prior to marriage (her separate property). She does not work there; employees run it for her. The income from the business would be the wife’s separate property, even if acquired during the marriage.
- Characterization of Active Small Business Income. If the business generates income from the spouse’s activity, that portion of the income is treated as the spouse’s earnings (i.e., community property if earned during the marriage). Take the example above, but this time assume the wife actively manages the coffee stand during the marriage. Her business’s income during the marriage would probably be community property.
- Characterization of Passive Small Business Appreciation. If the business appreciates in value without either spouse’s work, the appreciation takes on the character of the business. In this example, assume the wife owned the coffee stand prior to the marriage (her separate property), her employees run it for her (passive business activity), and the business increases in value by $100,000 during the marriage. The appreciated value would be the wife’s separate property.
- Characterization of Appreciation from Spouse’s Activity. This is where the biggest twist comes into play. Appreciation from a small business that a spouse actively ran is treated as the spouse’s earnings (i.e., community property if earned during the marriage as in example 2) ONLY TO THE EXTENT the business underpaid the spouse. If, on the other hand, the business compensated the spouse a fair wage, the appreciation takes the same character as the business. For this final example, assume the wife actively managed her premarital coffee stand, but she paid herself a manager’s salary during the marriage. The business’s appreciation during the marriage would remain the wife’s separate property.
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