California is a pretty incredible state filled with movers and shakers building businesses, starting restaurants, launching websites, growing real estate empires, and generally leaving their mark on the world. We also tend to be aware that we didn’t get here on our own, and that even our stand-out innovators and disruptors owe some of their success to the support and contributions of others.

So too in our state’s conception of marriage. California is one of only 9 community property states across the nation, which means we recognize marriage or domestic partnerships as both a personal and a business relationship. What we earn during our marriage is considered community property, and community property is divided equally in the event of a divorce. By contrast, separate property reflects those assets and debts we had before the marriage or that grew from our separate property.

One way to think of assets in a California marriage is as falling into one of three buckets: yours, mine, and ours. So in establishing whether income from separate property is considered community property in California, the short answer is: it depends. Indeed, it depends on the answers to key three questions:

1. Was there a prenuptial (or post-nuptial) agreement?
2. Was the separate property commingled with community or quasi-community property?
3. Was the separate property transmuted?

Let’s take each of these in turn.

Was there a Prenuptial (or Post-Nuptial) Agreement?

California gives parties to a marriage some pretty incredible rights. One of these rights includes the ability to change the “characterization” of separate property and community property. When we talk about property, we mean money and things money can buy (including investments, real property, or tangible objects like art or jewelry). Characterization means whether that property is considered separate, community, or quasi-community.

Separate property means that property you either owned before the marriage or acquired during the marriage through inheritance or a gift to you alone. Community property is everything else: all the property acquired or earned during the marriage that isn’t separate property. (Quasi-community is basically the same thing as community property but it reflects community property acquired if you lived outside of California during the marriage.)

So what does it mean to change the characterization of property? Simply put, it means that you and your spouse can agree that community property is separate property—or vice versa, or any combination thereof—through a written and signed agreement. If you reach this agreement before the marriage, it’s called a premarital or pre-nuptial agreement. If it occurs during the marriage, it’s considered a post-nuptial agreement.

Q: In the event of a pre-nuptial or post-nuptial agreement, is income from separate property community property?

A: Every agreement reflects the parties’ unique intentions for separate property. It depends on what your agreement says!

Was the Separate Property Commingled (Mixed) with Community Property?

In the absence of a pre-nuptial or post-nuptial agreement, separate property that stays separate is considered separate property, including any income it may generate. So if you kept money separate (e.g., in a bank account in your name only) and did not spend separate property money on community activities, including as part of your divorce proceedings, then your separate money stays yours.

However, earmarking separate property as separate gets a bit complicated if you invest your time and energy into the separate property during the marriage. Here are two examples to clarify this distinction:

Hands-off investments. Say you have a separate property money market account that you don’t touch during the marriage. All the interest you make is your separate property income. No community property time or labor was spent improving this asset, so the community is not entitled to any of it.

Hands-on investments. Say you have a separate property investment home that you rent out. Throughout the marriage, you spent every weekend improving the property, but only spent profits from your tenants’ rent on hard costs. Here, the community may be entitled to reimbursement for the improvement to the property (its increase in value) during the marriage.

Separate property can also be mixed (commingled) with community property by spending your separate property assets on community expenses (contributing to the down payment of a home with separate property, for example, or paying off credit card debt with separate property assets). Sometimes this commingling is unintentional. If you keep the same job as you had prior to marriage and keep contributing to your pension or retirement accounts, then you’ll have separate property (what you contributed before you were married) and community property (what you contributed during the marriage) in the same account.

In the event separate property becomes commingled with community, dividing it fairly can be a labor-intensive process that may require the help of a forensic accountant to perform what’s called a direct tracing of community property.

Q: In the event separate property was commingled with community property, is income from separate property community property?

A: If not the original asset (or amount of assets) itself is separate property, then yes, potentially some of its growth or gains may be considered community property. However, this is not a hard-and-fast rule and may require sophisticated accounting to calculate and prove.

Was the Separate Property Signed Over (Transmuted)?

The last factor that determines whether separate property is community property is whether the separate property was “transmuted” during the course of the marriage. Again, our state gives Californians broad powers to give or transfer ownership of their separate property assets. This power can work one of three ways:

• You can transmute your separate property into community property
• You can transmute your community property into separate property
• You can transmute your separate property into your spouse’s separate property.

As with pre-nuptial or post-nuptial agreements, this change in characterization must be completed in writing.

Q: In the event property was transmuted, is income from separate property community property?

A: This one is about as complicated and case-specific as it gets. If separate property was transmuted into community property, then yes, its income is community property. If community property was transmuted into separate property, then no, its income is likely not community property. And if your separate property was transmuted into your spouse’s separate property, then, no, its income is likely not community property.

However, these answers should be taken with a healthy grain of salt. Much depends on when assets were transmuted and does not necessarily answer whether the community is entitled to reimbursement for labor contributed to separate property assets during the marriage. If any of these cases apply to you, your best bet is to speak with a certified family law specialist who can help you understand your rights and responsibilities.

Is Income from Separate Property Community Property in California?

As we’ve seen, this is a complicated question with a variety of considerations. At its core, though, the thing to keep in mind is how California approaches marriage and domestic partnerships as akin to a business partnership: what you earn together, the state expects to see you share—both during and after a divorce. However, the state also gives Californians broad powers to determine the terms of that business partnership best suited for them: through pre- and post-nuptial agreements and the ability to transmute assets. If you’re considering marriage—or divorce—in California, your best business decision may be speaking with an expert who can help you understand your rights and your options.

At Van Voorhis & Sosna, we know the complexities of prenuptial agreements and divorce in the Bay Area because it is our sole focus. We offer legal advice and representation based on integrity, trust, and understanding. Contact us today, or call 415.274.2530 to schedule a free legal consultation.