The property division aspect of divorce is essentially a three-step process. Each asset or liability is characterized (either separate or community), valued and distributed. California law provides for an equal distribution of the community assets. Getting to that point, however, is full of twists and turns.
Separate property is usually defined as property acquired prior to marriage, after separation or during marriage if by gift or inheritance (bequest, devise or descent). Absent an agreement to the contrary (see our prenuptial page), community property is property acquired during marriage and not from a separate property source.
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California Community Asset Lawyers
Initially, it is important to obtain as much of the financial information about your marriage as possible. Important sources of information are bank statements, checking account ledgers, credit card statements, loan applications, computer/electronic bookkeeping programs, investment records, deeds to real property, spreadsheets, property management statements and three to five years of past income tax returns with the supporting documentation.
Additionally, information regarding the amount and source of all the current income of both of the parties is important. For example, pay stubs reflecting year-to-date income will provide not only information on income and bonuses but also accrued vacation time, sick leave and employment benefits, such as health insurance, pensions, and 401(k) or similar programs.
In addition, the source of the funds used to pay for assets can be important information. Therefore, tracing the history of each asset is a task that needs to be accomplished. For example, the down payment for property may have been savings earned prior to marriage. Thus, the property is of mixed character (i.e. partially community and partially separate). The person making that down payment may be entitled to be reimbursed for the down payment.
In our complicated lives, our financial decisions also tend to be complicated. It is not uncommon to borrow from a separate property source and invest in community property. How title is taken, the source of the funds used for purchase or improvement, and how the property is treated during marriage is important information directly affecting one's property interest. The history of the asset can dictate the distribution at the time of divorce.
We are often asked about how divorce interplays with taxes. To be effective, you should have an accountant working with you during the divorce. A few basic rules to keep in mind are:
1) Your marital status on December 31 dictates your tax filing status for that year (see our Divorce topic heading).
2) Property division incident to divorce is a nontaxable event.
3) Early retirement (401(k), IRA, etc.) and pension withdrawals are subject to penalties and taxation.
4) Pensions and retirement benefits can be divided in nontaxable, penalty-free orders (commonly known as QDROs, or Qualified Domestic Relations Orders).
5) Spousal support paid pursuant to a court order may be deductible by the payer and income to the payee (see our Support heading).
6) Child support is not deductible by the payer nor is it income to the payee (see our Support heading).
7) If you file a joint tax return, you are jointly and severally liable for that return.
The decisions you make in your divorce have repercussions for years. Make the right decision now and contact us for an appointment.