How Do Married People in California, Change the Characterization of Property?

In California, a married couple can change the characterization of property from one party’s

Discussion with a real estate agent

separate property, to both parties community property, and visa versa. They can also change the characterization of the community property of both parties, to the separate property of one party. And, they can change the separate property of one spouse to the separate property of the other spouse.

This process is referred to as a “Transmutation.” A Transmutation is a change in the characterization of marital property in California.

Before 1984, parties could verbally change the characterization of property. For instance, property acquired or bought before marriage, is the separate property of the party who acquired it.  Previously, the owner of a separate property residence or home, for example, could “transmute” the characterization of his or her property, simply by stating that s/he intended to do so. A person could say to his or her spouse, “Honey, I love you. Therefore, my home is your home.” Back in the day, that was a valid transmutation.

However, as time progressed verbal transmutations created problems of proof. Furthermore the legislature, in its ultimate wisdom, disfavored changes in the characterization of property which were traced to “pillow talk.” Therefore, in 1984, the legislature enacted section 852 of the California Family Code. Subsection (a) provides that a transmutation of real or personal property must be in writing, it must be consented to by both parties, and it must be signed by the party whose interest is adversely affected.

So what counts as a valid Transmutation in California? I recently had a case which involved an inter-spousal transfer deed. The parties bought a home while they were married with husbands wages. Remember, wages are community property. Therefore, the home was community property. Years later, the property was upside down. At that time, wife decided she no longer wanted any responsibility for the property. So she signed an inter-spousal transfer deed, wherein the property was transferred to the husband and became his separate property.

What were the consequences of wife having signed the inter-spousal transfer deed? Well, when the parties divorced and the property was sold, wife was no longer entitled to split the proceeds of the sale. It all went to husband! I found case law which stated that an inter-spousal transfer deed satisfies the requirements of Section 852 (a)! That is because it was signed by the wife at the time of conveyance to the husband, and she was the party whose interests were adversely affected. Also, both parties signed and consented to the inter-spousal transfer deed.

But be careful. Sometimes one may think there is a valid transmutation when there is not. For instance, it has been held that a notation in escrow to divide proceeds from the sale of a family residence on a 50/50 basis, did not constitute a transmutation. Or put differently, it did not change the characterization of the proceeds from the sale of the property, from the community property of both spouses to the separate property of each spouse, after the sale. Why? Because the escrow notation was not signed by the parties.

Finally, a mere agreement to divide proceeds of the sale separate property residence, does not changed the characterization of said property from separate to community. Why? Because, once again, per the requirements of section 852 (a), the party whose interests are adversely affected must state, in writing, that s/he is aware that she is giving up his or her interest in the property.

If you are in doubt about the characterization of property at the time of divorce, it is best to consult with an attorney who is versed on this topic. People often times think they have met the requirements of Family Code section 852 (a) when they have not. I have even known a few attorneys who do not fully understand the requirements of section 852 (a).