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Profits from separately owned capital generated without community labor are separate property. If the labor of a spouse is involved in the creation of those profits, they must be apportioned between separate and community property. There are a number of formulas used to determine community and separate shares.

Pereira: In Pereira v. Pereira 156 Cal. 1 (1909) the court calculated an annual return on the separate capital just as you would determine interest on a CD and then it assigned any remaining profits to the community. In the Pereira test the separate return is fixed by the rate of return from interest while the community return floats. The legal rate of interest is the presumptively correct rate of return. Interest rates may be proved to be higher by evidence before the court of the cost to borrow money to replace the capital. The court has the discretion to compound the interest if the profits are retained for a number of years. Even where the returns of a business vary over time, courts have been directed to look to the overall value at the end of the marriage. Some courts do look at unusual but sporadic and large ...

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