Improving Separate Property and Transumtation Rules

We want to talk about the effect of improvements to separate property in an Arizona divorce by discussing the Arizona Court of Appeals’ decision addressing what impact improvements to a spouse’s separate property has on a divorce in Arizona.

The Arizona Court of Appeals in the case of Potthoff v. Potthoff had to address an Arizona divorce court’s ruling that land husband owned prior to marriage was transmuted from separate property to community property and, thus, Wife was entitled to an equitable share of that property.

Separate Property and Community Property Presumptions

The appellate court began its analysis by relying upon the seminal Arizona case of Cooper v. Cooper, which held that property acquired prior to marriage is the sole and separate property of the spouse who owned that property prior to marriage and that property acquired during a marriage is presumed to be community property.

The appellate court added that property acquires its status as sole and separate property at the time it is acquired, citing the Arizona Supreme Court case of Lawson v. Ridgeway.

Date of Acquisition is the Date a Contractual Right Exists to Own the Property

Further, the date of acquisition is determined as of the date the contractual right to have title to the property occurs, not when the title is actually subsequently transferred, citing a New Mexico Supreme Court case of Hollingsworth v. Hicks as authority.

The appellate court specifically found that the real estate at issue, in this case, is, in fact, Husband’s sole and separate property.

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Using Community Funds to Improve Separate Property Does Not Transmute the Property

The court, therefore, analyzed the case to determine if the nature of that property changed to community property by agreement of the parties or other operation of law.

The appellate court found that the use of commingled funds or community funds to pay the obligations on the properties did not change the character of the property and, at most, the community may have a community lien against Husband sole and separate properties, citing the Arizona cases of Lawson v. Ridgeway and Tester v. Tester as authority.

Improvements to Separate Property in an Arizona Divorce.

The appellate court went on to rule that use of community funds used by Husband to build a shopping center on one of the properties during the marriage also did not change the character of the then-vacant land into a community asset, citing the Arizona case of Lawson v. Lawson as authority.

Improvements to Separate Property are Separate Property

The court cited the Arizona Supreme Court case of Brown v. Brown that “improvements” to property acquire the characteristics of the property upon which those improvements are made, such that improvements to separate property made during the marriage remain the separate property of the spouse owning that property as his or her separate property.

Guarantors and Community Labor do not Transmute Separate Property in Arizona

The appellate court also rejected Wife’s argument, citing the case of Porter v. Porter, that her mere signing as a guarantor on the construction financing loan to build a shopping center on Husband’s then sole and separate property transformed the property into a community asset.

The court also rejected Wife’s argument that Husband’s expenditure of time and effort in overseeing the construction and subsequent operation of the shopping center transmuted that property to community property.

The court held that, pursuant to the prior ruling in Cochrill v. Cochrill, there may be a community interest in the “profits” of a sole and separate business in the form of a community lien. However, such labors do not change the character of the property as Husband’s sole and separate property.

Lastly, the appellate court rejected Wife’s reliance on the California Supreme Court of In re Nelson’s Estate for the proposition that Husband transmuted the property from sole and separate to community property simply because the parties’ listed those properties on their income tax returns as community property.

In certain circumstances that case may apply to support a claim, the property was transmuted, but it does not do so automatically as a matter of law.

Arizona Community Property Attorneys

If you have questions about the effect of improvements to separate property in an Arizona divorce, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property and family law attorneys have over 100 years of combined experience successfully representing clients in community property and family law cases.

Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.

Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your community property or family law case around today.

Scottsdale Arizona Divorce, Family Law, and Estate Planning