What happens when you add a spouse to a loan on a Separate property but not on title?
If you live in a community property state like California, then you may know that typically your community assets and community liabilities will be divided jointly between you and your spouse in the event of a divorce. In California, that property may have appreciated greatly to the benefit of the Community.
However, when you have Separate Property that has Separate appreciation in the property and you want to keep those gains Separate, you have to be careful not to transfer over those gains to the Community.
Did you know that the Community can take over some or all that hard-earned Separate appreciation in the property before they even make one payment towards the principal? One way that can happen is when you add your spouse to the home loan. You are not only risking transmuting the property to Community by adding them to the loan (bringing up a host of other legal issues), but by adding them to the loan, you can instantly transfer all of those Separate gains to the Community.
Spouses can be added to the loan for a myriad of reasons, but most commonly it is done in order to get a better interest rate. For example, your spouse may have a better credit score than you, or their income can help your debt to income ratio which in turn would secure you a considerably better interest rate on your loan (again, possible reasons that may transmute the property to Community even though they are not added to title). But assuming that in this scenario the Property remains Separate Property, because your spouse is not actually on the title, if they are on the home loan or refinance, that may increase their pro-tanto interest in a Moore-Marsden calculation.
When completing a Moore Marsden calculation, your Expert will tell you that the party that makes the mortgage payment gets credit for the principal paid. While that is true, once you add the other spouse to the loan, they are now also “liable” for the loan. This means that they will get the same credit as if they were making the payment. Now the Community is responsible for making the balance of the Principal Payment of the acquisition price, which may increase its pro-tanto interest substantially. So, even if the Community doesn't make many payments, if you add them to the loan, all of a sudden the Community may acquire a huge built-in gain or loss because the Community has just acquired the obligation of the acquisition principal.
Now that you know this key bit of information, you may want to think twice before adding a spouse who is not on the property title, to the home loan.
If you have any questions about how adding a spouse to a loan will affect your Moore Marsden calculation or any other Moore Marsden issue, contact us MooreMarsdenExperts.com! Did you know that in addition to being CPA's, we are also Licensed Real Estate Brokers?
This newsletter is information in general about the Moore Marsden calculations and not tailored to your specific case which may have a different set of facts and circumstances. Consult your Attorney and your Moore Marsden Expert for your individualized calculation based upon your individual facts and legal issues.
