Thursday, October 16, 2008

Property Downpayment in a Divorce: Does He Get His Down Payment Back?

Dear Famularo & Associates:

My husband and I have been married for almost eight years, and we are now in the process of getting a divorce. While we were married, we bought a house together. My husband used money he inherited from his mother to put a $50,000.00 downpayment on our home. We purchased the house four years ago for $500,000.00. Unfortunately, the housing market has since crashed and there is no longer any equity. I do not believe the house is even worth $350,000.00 today, and we still owe $450,000.00 on the home.

We purchase the house in both our names. Now, my husband says that since the downpayment came from an inheritance, I owe him half of the downpayment. Is this true?

D.B. in Wildomar

Dear D.B.

What your husband is referring to is something called a 2640 reimbursement. The name comes from Section 2640 of the California Family Code. A spouse who uses separate property to purchase a community property asset is entitled to have his or her separate property downpayment repaid during a divorce. Since your husband acquired the $50,000.00 from an inheritance, which is not the result of either spouse's time, effort or skill, the $50,000.00 would be characterized as separate property. However, there are several limitations to being reimbursed under this law.

First, your husband would have to prove through written documentation that the $50,000.00 was acquired through inheritance. This is called tracing. He could do this by producing a will, a copy of a court order, bank statements reflecting the transfer of the money, or any combination of documents which show the money was an inheritance. On the other hand, if you admitted the downpayment came from an inheritance, no tracing is required.

Second, your husband is not entitled to any interest on the money. He is entitled to be repaid the principal on the downpayment, and no more. If your husband used some of his inheritance money to pay the homeowner's insurance or property taxes, he is not entitled to have that money repaid. The answer is more complicated if he used his separate property to make improvements or pay the mortgage payment.

Finally, recovery of the $50,000.00 comes off the top of any equity in the home, and repayment of the $50,000.00 is limited to there actually being equity in your house. Since you owe more money on your house than it is worth, there is no equity from which the $50,000.00 may be repaid. Therefore, your husband will not be able to recover his downpayment from your home.

If, on the other hand, the two of you had $100,000.00 in equity in your home, the 2640 reimbursement would work as follows: your husband would be reimbursed for his separate property downpayment by receiving the first $50,000.00 in equity. Any remaining monies would be divided equally. Thus, your husband would not only receive his $50,000.00 downpayment, but also one-half of the remaining equity, for a total of $75,000.00, while you would receive $25,000.00.

Famularo & Associates
Temecula Attorneys

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