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Where community funds are used to make payments on 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. This rule has been commonly understood as excluding payments for interest and taxes. The community is entitled to a minimum interest in the property represented by the ratio of the community investment to the total separate and community investment in the property.
In a dissolution of marriage proceeding, the trial court concluded that a residence purchased by the wife before marriage was her separate property but that the community had an interest in it by virtue of the community property payments made during the course of the parties' marriage. The trial court further concluded that the community interest was to be determined according to the ratio that the reduction of principal resulting from community funds bears to the reduction of principal from separate funds. No credit was given for the amount paid for interest, taxes and insurance. The community interest was calculated by multiplying the equity value of the house by the ratio of the community's reduction of principal to the total amount of principal reduction by both community and separate property. The wife's separate property interest was calculated by multiplying the equity value of the house by the ratio of the separate property reduction of principal to the total amount of principal reduction. The trial court also found that the husband deliberately misappropriated items of community personal property by disposing of them without valuable consideration and without the consent of his wife in order to purchase alcoholic beverages, and made a compensatory award to the wife pursuant to Civ. Code, § 4800, subd. (b)(2). The husband sought review.
Did the trial court properly compute the interest obtained by the community in the wife’s separate property?
On review, the Court reversed the trial court's determination of the community property interest in the residence, because the trial court failed to exclude amounts paid for interest, taxes, and insurance from the calculation of the respective separate and community interests. According to the Court, since expenditures for interest and taxes would not increase the equity value of the property, they should not be considered in its division upon dissolution of marriage. The Court further held that the value of real property was generally represented by the owners' equity in it, and the equity value did not include finance charges or other expenses incurred to maintain the investment. Amounts paid for interest, taxes and insurance would not contribute to the capital investment and were not considered part of it.