Tracing Separate Property Down Payment

Posted: 19 July, 2022

Smith v. Smith; How the court handles separate property down payments on a marital home. 

After two years of marriage, Bob Smith (not his real name) and Nancy Smith (not her real name) would like to file for divorce. They are both in their 60’s. This is a second marriage for both of them. They have no children, or major assets other than a home.

Bob owned a home prior to marrying Nancy. He sold this home, netting him $500,000. He then used this $500,000 as a down payment on a new home. The new home was purchased two months after the marriage to Nancy. Both Bob and Nancy’s name are on the title of the home. There is no mortgage or loan.

The value of the new home is $600,000. Bob would like to get back the $500,000 down payment he made to purchase the home. He is willing to share the remaining $100,000 equally.

This is a case of beating the strong presumption that all assets acquired during the marriage are community property. In Nevada, any property purchased during a marriage is considered community property. Community property is property owned by both the husband and wife and is divided equally in a divorce.

The home was purchased during the marriage. Absent compelling evidence the courts would find the home is community property and divide it equally. The court would have the home sold, and Bob would get $300,000 and Nancy would get $300,000. Or, either Bob or Nancy could keep the home by buying the other out for $300,000.

To prevent this outcome, Bob needs argue that the $500,000 down payment was and is separate property. Separate property is property owned before the marriage and is not divided equally like community property. Bob would like to keep all $500,000 as his separate property.

You can turn separate property into community property if the court finds you gifted your separate property to the community, so the first argument Bob needs to make is that adding a spouse’s name to the title does not automatically turn separate property into community property.

In the case of Schmanski v. Schmanski, the court found the signing of a deed is not by itself always enough to determine that one spouse gifted separate property (a home owned before the marriage) to the community.

The court wanted to know more of “the why” a spouse’s name was added to the title. Sometimes you might add a spouse to the title because you are gifting it, and sometimes for might do this for estate purposes. For example, you might add your spouse’s name to a deed with the letter “JTWROS”. These letters stand for; Joint Tenants With Rights of Survivorship. This means either spouse would get the property if the other spouse dies. Giving a spouse rights of survivorship might only be declaring the house to go the spouse upon death, and not declaring a gift.

However, the court did conclude that even if the deed doesn’t automatically transmute separate property into community property, it is presumed to be a gift to the community unless the presumption is overcome by clear and convincing evidence. Divorce attorneys call this a “rebuttable presumption”. In other words, the attorney has the burden to show the court why the deed was signed the way it was, or the court will find it to be a gift to the community.

What Bob needs is convincing evidence that his intent was not to gift the house, but to only give Nancy the house if he died while they were married. Nevada law requires the judge to consider the intent of the parties.

The leading case for “intention of parties” appears to be Sprenger v. Sprenger, where the court found spouse never intended to make a gift to the community. Husband testified that he never intended to make a gift to wife of any interest in the property. Court held that the appearance of wife’s signature as a shareholder on certain documents, without more, is not clear and convincing evidence of gifting separate property.

This case is on point for Bob. We have Bob’s statement that he didn’t intend to gift the $500,000. We also have a $500,000 down payment given two months after the marriage. The court might be persuaded by this fact. Does anyone intend to give their spouse $500,000 after two months of marriage?

If Bob isn’t able to rebut the presumption of community property with the intent of the deed, he may be able to turn to tracing separate property.

If the owner of separate property funds commingles these funds with community funds, the owner now has the burden of rebutting the presumption that all the funds in the account are not community property. The best way to rebut this presumption is tracing.

In other words, can Bob show the $500,000 came from separate property assets. If Bob can show the $500,000 was clearly from the sale of the separate property home before being used as a down payment, the court may allow him to keep that amount as separate property.

Bob alleges the proceeds from the first home were immediately placed into escrow for the marital home. If this is verified, there should be no problem tracing the funds.

We had our work cut out for us. We had to gather evidence to support Bob’s testimony that he didn’t intend to gift the $500,000 to the community. He signed the deed during the closing and didn’t really think about Nancy being own the deed.

We did find the evidence that the $500,000 could be traced. The bank records, and real estate records showed Bob received $500,000 from the sale of a home owned before the marriage. The cashier’s check was deposited directly into escrow for the new home.

The judge wasn’t completely sold on Bob’s intent when he titled the deed. But, the judge could clearly see the $500,000 was separate property funds. The funds could be traced. The judge ordered the home to be sold. Bob gets $500,000 and the remaining $100,000 will be split evenly between Bob and Nancy. In total, Bob received $550,000 from the sale of the marital home. Success!