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Family Code 2640 and Divorce Mediation.

by | Sep 27, 2023 | Divorce

I am sorry.  Once again I am referencing a Family Code section in my blog title this week.  Last week I led with case names and grappled with reimbursement claims arising in divorce, getting into some technical and somewhat boring stuff.  While statutes and case citations are less than sexy, it is my contention that the path to a healthy divorce is accomplished by educating couples so they understand their rights and responsibilities and have all the information they need to make their own decisions working with their spouse so decisions do not need to be made by a Judge.  Learning some of this technical stuff is part of that process.  Today we tackle the right to reimbursement arising from one spouse using their separate property to purchase, pay down a loan, or improve a community property asset.  Let’s roll up our sleeves and tackle two concepts at play with this reimbursement claim;  separate property and the tracing of that separate property into a current asset.


Family Code 2640  Family Code 2640 states unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.”


Let’s simplify the language and break it down into smaller bites:


  1.  If you used your separate property to
  2. Purchase community property, pay down principal on a community property loan, or improve a community asset
  3. You are entitled to be reimbursed for such contribution if you can trace the contribution into an existing asset
  4. With the reimbursement limited to the current equity in the asset.
  5. And the reimbursement waivable with a writing.


Let’s now address these requirements one at a time.


Separate Property  For starters, we differentiate between community and separate property.  We presume that everything obtained between the date of marriage and the date of separation is community property.  The exception to this rule is separate property which is property inherited or gifted to one party during the marriage or anything owned by either spouse prior to marriage.  If something is purchased during marriage using separate property funds then the asset is no longer presumed to be a community asset.


Used to Purchase Community Property   Family Code 2640 has two separate focuses.  The first is separate property going into a community asset which is what we are discussing in this posting.  The second is when one spouse’s separate property goes into the other spouse’s separate property, which also gives rise to a reimbursement claim.  We might typically see a 2640 claim arise where one spouse has savings at the time of marriage and shortly after marriage those funds are used for a down payment on the family home which is purchased jointly by the parties.  Another common scenario is when one spouse owns a home before marriage and during marriage they sell the residence and use the proceeds to put a down payment on a joint residence.  A third common occurrence is one spouse receives a gift or inheritance during the marriage which is used to buy, pay down a loan balance, or to fund an improvement to the property.  In all three of these cases there are facts giving rise to a 2640 claim as separate property owned by one spouse is being used to purchase/improve a community asset.  


Following the Money and the Tracing Requirement.  As I mentioned earlier, the presumption when assets are purchased during the marriage is that they are a community asset.  To be eligible for a 2640 reimbursement claim you must prove that the separate funds ended up in an asset presently held by the couple.  If you received $50,000 in an inheritance but cannot prove that those funds went into the property then there is no right to be reimbursed if those funds are otherwise depleted.  To be granted the reimbursement, you must prove to the Court that the $50,000 was received as an inheritance, and that those $50,000 went directly into the house.  The tracing would consist of putting together documents confirming the inheritance, following the money from receipt into a segregated account, and then going from this account into escrow which closed resulting in the ownership of the home.  The documents would include bank statements, canceled checks, and closing statements proving each step of the journey.  


Tracing Complications.  If everything could be so easy.  We are frequently faced with 2640 claims that become much more convoluted.  One complication is when the separate funds are commingled with community funds and these combined funds are used for the purchase.  Sometimes there is a long passage of time between when the separate funds are initially received wherein funds are added and withdrawn from the account up to the point when the funds are used to make the purchase/improvement.  Sometimes there are multiple transactions through which the funds must be traded.  Maybe the funds were originally used to buy one joint home which was sold with half of the funds going into a second home and half of the funds being used for some other purpose.   To navigate these scenarios there are additional legal concepts which provide the road map to sorting out the degree of the ongoing separate claim.  The scope of this article is to inform you of the general tracing requirements and if you want to assert a reimbursement claim it will be important to obtain the necessary information to understand the value of your claim.


Limitations on the Claim  In order for your 2640 reimbursement claim to survive, the separate money must be traced into the current asset and there must be sufficient equity in the asset to cover the claim.  If you buy a home for $500,000 using $50,000 of your separate property for the down payment and taking a loan for $450,000, then the market goes down and at time of divorce your house is worth $450,000 and the $450,000 is still owing, there is no 2640 reimbursement claim because that equity does not remain in the asset.  If the $50,000 went into the purchase of a first home that sold with only $20,000 realized, which was then used to buy a second home that now has $100,000 in equity, the claim would be capped at $20,000 as that is only how much of the money can be traced through the first transaction.


Waiver of Claim.  Claims are also limited if somebody waives the reimbursement claim in writing.  If when you were buying the joint residence you signed a writing that said “I hereby waive any separate property claim I have in this $50,000 we are using to make the down payment on our joint home” then at time of divorce you likely would not be able to pursue a reimbursement claim.  Usually the writing may not be so obvious and there will be question in whether it results in a waiver of the right.  Signing an interspousal transfer deed or Quitclaim deed does not in and of itself result in a waiver of the claim.  The clear intention to waive the right would need to be obvious in the writing.


I apologized when we began because I knew I was about to open up another can of legal worms this week.  I like to assure couples that the issues they need to sort out in their divorce are not too difficult to understand, and with a little professional guidance they can be delivered to a well informed place where they can make good decisions for themselves.  As more complicated scenarios arise, it becomes all the more important that you work with professionals that can provide you the information you need to make informed decisions.  Sometimes we just need to dive in a little deeper with the education piece to assure you are delivered to that healthy place of understanding so well informed decisions can be made.