Divorce cases are notoriously challenging to navigate because of the strong emotions and high-stakes nature of issues like child custody and property division. Separated spouses with a high net worth or extensive assets can face particularly difficult divorce cases, as can partners with assets like businesses and pensions that are complicated to divide.

Having a divorce attorney with targeted experience with similar cases is an invaluable resource in complex divorces. If you expect to face challenges with property division during your divorce, contact Sarieh Law Offices to schedule a free consultation.

Property Division in California Divorces

The first step is identifying and characterizing property. In California divorces, property can include real estate, personal property, retirement plans, businesses, insurance policies, and stock options. Personal property includes items like vehicles, jewelry, antiques, and furniture. After identifying each item of property, they must be classified as separate property or community property.

California follows a community property rule, which means that any property acquired during a marriage is owned by both spouses equally. Unless a prenuptial or postnuptial agreement exists, any community property is likely to be divided equally or 50/50 between spouses in a divorce. There are exceptions, of course, but this is the generally accepted rule in community property states.

Property that is not considered community property is usually classified as separate property. Separate property is any asset or debt that is acquired prior to the marriage, after separation, or as a gift or inheritance.

Courts will look at numerous factors when considering how to distribute community property, such as:

  • The value of the property
  • Any income produced by the property
  • How the property is titled
  • Prenuptial and postnuptial agreements
  • Tax consequences of distributing the property
  • Debts and liabilities associated with the property

Despite the community property rule of dividing assets and debts equally, the end result may still leave one spouse in a better financial position than the other. When that happens, the court may order an equalization payment be made to the spouse receiving less marital assets.

What is an Equalization Payment in a Divorce?

An equalization payment is money paid by a spouse who receives a more valuable share of marital assets in a divorce. That spouse makes the payment to the other spouse in order to make the division more fair and closer to an equal split. Divorcing spouses can agree to the division of property and the amount of the equalization payment, but courts can also order this if an agreement cannot be made.

In most circumstances, equalization payments in a divorce are not taxable in California. It is recommended that divorcing partners consult with a tax professional to ensure all considerations are made regarding tax obligations and liabilities. Capital gains tax, for example, is common in divorces when property changes ownership and equity is involved. However, most spouses will not need to pay taxes on their equalization payments. If you are concerned about the tax requirements, consult with a tax professional or ask your divorce attorney to recommend someone they trust.

Calculating Equalization Payments

Equalization payments in a divorce in California are calculated by following numerous complex steps. The complicated considerations mean that consulting with a family law attorney is the best way to prepare for this aspect of your divorce. The following steps may provide a general roadmap for how equalization payments are calculated, but each case is unique.

Valuing Assets

Once you and your spouse have identified each item of community property to be divided, the assets will need to be valued as of the date of your separation. Some property will be easier to value than others. For example, basic checking and savings accounts can often be easily valued by referencing the statement from the date of separation. In contrast, pension plans and privately held stocks tend to be much more difficult to place a value on.

Subtracting Debts

Some debts are also considered community property and must be included in the process of calculating equalization payments. Separate debts and shared debts will be divided accordingly and then subtracted from the total value of assets you and your spouse hold.

Calculating Value on Marriage Date

The total value of your assets and debts when you and your spouse were wed is also relevant when calculating equalization payments. You will subtract the total property value as of the marriage date from the value as of separation.

Excluding Certain Property

If either spouse has inheritances, gifts, or other qualifying property, they can deduct the value from their total property value.

Comparing the Two Values

Once both you and your spouse have calculated your separate property value, you can then compare the amounts to determine if either should make an equalization payment. For example, if Spouse A has a final property value of $120,000 and Spouse B’s total value is $180,000, Spouse A may be owed an equalization payment. The payment generally equals half of the difference. So, in this example, Spouse B would owe Spouse A $30,000, which is half of the $60,000 difference in their property values.

This is a simplification of a very complex process, but it can give you an idea of what the process may look like. If you have questions about your specific property division or would like to discuss other elements of your divorce case, contact Sarieh Law Offices to schedule a consultation.